With investors willing to pay 19 cents for every dollar of outperformance, the investment management industry is able to garner approximately $600 billion in active fees every year, reports State Street.
In its report titled “The Folklore of Finance – How Beliefs and Behaviors Sabotage Success in the Investment Management Industry,” State Street notes that true success for investment professionals involves not only producing alpha but also enabling investors to achieve their long-term goals over time.
Active Management – 60% capital in pursuit of alpha
According to the State Street report, as the investment management industry is devoted to producing alpha for investors, it spends over 60% of its capital on the pursuit of alpha, which is handsomely rewarded if delivered. However, despite this devotion, alpha remains elusive, with true alpha becoming harder and harder to produce. The following graph highlights that the industry spends more to get less:
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Interestingly, in total, the industry generates approximately $600 billion in active fees every year, equaling Switzerland’s GDP.
The State Street report notes that nearly 80% of institutional investors realize the importance of achieving long-term goals. However, as captured in the following graph, there is a gap between the perceived importance of achieving long-term goals and their proficiency in achieving them:
The report explains that due to this proficiency gap, many institutional investors are struggling to achieve their goals. For example, as of 2013, the largest 100 U.S. public pension funds were, on average, less than 70% funded, and unfunded liabilities totaled $1.3 trillion. Thus, only 12% of individual investors could say with confidence that they were prepared to meet their investment goals.
Active Management – Financial services the least trusted industry
According to the State Street report, the industry faces a new crisis of faith driven by “the 3Ds,” as investors share a deep distrust of the industry that leads to their dissatisfaction, which drives increasing dis-intermediation, in which a growing number of investors believe they can do the job of investment professionals themselves. The following captures the CFA Institute and Edelman’s Investor Trust Study, which was conducted in 2013 and highlights the financial services industry as the least trusted industry:
Even State Street’s most recent research found that only 49% of investors believe their provider is acting in their best interest. The report concludes that the industry needs to generate a new “folklore of finance” that reinforces the values necessary to achieve true success.
Active Management : Strongest growth since financial crisis
In its report titled “Global Asset Management 2014: Steering the Course to Growth,” The Boston Consulting Group noted that in 2013, asset managers finally recorded their second consecutive–and strongest–year of solid growth since before the crisis. As set forth in the following graph, the global AUM touched a record $68.7 trillion in 2013:
However, their net revenues remained relatively flat and below their peak, while costs decreased from 18.5 basis points to 17.9 basis points:
The BCG report also points out that investors have become more demanding and more likely to prefer particular outcomes or solutions that are specifically oriented to their needs, beyond performance relative to a benchmark:
The BCG report concludes that with traditional active core assets continuing to lose share, navigating a differentiated growth path looks increasingly competitive, complex, costly, and constrained by waves of regulations. Thus, the authors of the report believe developing the right target operating model is crucial for asset managers if they are to steer strategically, safely, and efficiently.
The full study on Active Management fees can be found here State-street