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The investment management industry, with some $100 trillion in global assets under management (AUM), is at an inflection point. Set off by the 2008 crisis, we are seeing an asset class roulette that is changing the makeup of asset management.
Traditional equities still account for almost half of all managed assets worldwide, driven by institutional investors’ historical long-term equity and home country bias. However, much of those are legacy assets and the future for categories like large cap stocks looks bleak. Selected equity themes around active high-conviction portfolios continue to raise assets, but low-cost passive strategies are eroding the middle. While 80% of the Abu Dhabi Investment Authority’s assets are managed externally, 60% of those are in index-replicating strategies, and, in the US registered space, nine of the top 15 best-selling equity funds in 2011 were passive products. Additionally, a blockbuster phenomenon—more money to fewer strategic partners and even fewer products—has resulted in extreme industry statistics: In 2011, the combined top 1% of products attracted five times as much as the industry overall.
Bonds are another story. Notably, flows to asset management post-crisis have gone primarily to bond products, with over $1.2 trillion in new money since 2009. As a result, fixed income has surpassed 25% of managed assets worldwide. Hundreds of billions to global, emerging market, high-yield, local currency, and other bond strategies has catapulted large, global diversified “Goliath” managers, and selected specialist “David” investment boutiques into blockbuster league tables. For example, PIMCO’s total return fund, after a subpar 2011 year-to-date, added $6 billion in new money in the US, and another $2 billion to its Dublin UCITS version. The best-selling fund in the US year-to-date is a David boutique, Jeffrey Gundlach’s DoubleLine Total Return Bond, with $12 billion in new cash through June.
The same picture emerges globally. Among the Goliaths we see Vanguard, PIMCO, Franklin Templeton, T Rowe Price, and Blackrock, but also Davids such as DoubleLine, Carmignac, Investec, M&G, Value Partners, Newton, BlueBay, and others. Given that we are in a global debt crisis, crucial questions going forward center around yield vs. duration ratio of bond funds, greater credit/currency risks, and alternatives to achieve appropriate risk-adjusted returns.
Like bonds, alternatives are also on the rise. This loose asset class, on aggregate, has surpassed 7.5% of global AUM, with over half of cross-border flows last year going to alternative UCITS structures. Moreover, we see absolute return strategies lead the way in the US registered space. Global total return products are transitioning fixed-income heavy portfolios into more diversified vehicles and other asset classes. Vehicle agnostic, a wide range of institutions has increased allocations to alternatives to manage risks, liabilities, and returns. The mighty California Public Employees Retirement System has 25% in private equity, real asset, and absolute return strategies; the China Investment Corporation increased alternatives from 6% in 2009 to 21% in 2010; and Korea’s National Pension service has 8% in alternatives (up from 2.5% in 2007) and expects to increase it to over 10% soon. Additionally, investment solutions now approach $4 trillion in assets. Beyond the 10% of global assets in balanced vehicles, various forms of investment solutions total around $4 trillion as of 2012, among them lifecycle, multi-manager, fund-of-funds, multi-asset, risk-based, target-date, and other wrappers. Solution-based offerings garnered the equivalent of 60% of global long-term flows in 2011, casting a spotlight on permutations of popular investment themes, such as emerging-market equities and bonds merged into a balanced solution.
So where is the industry heading? Fixed income is on the rise for “risk-on” and “risk-off” parts of the portfolio. Large global Goliaths dominate as they build out multi-asset and high-yield solutions—a 30-year bond bull run, low rates, and a possible bubble notwithstanding. While some prominent voices such as Warren Buffett or Larry Fink are stating that “bonds should come with a warning label” and investors should be “100% in equities,” the reality of cash flows looks different—for now. As the global economy starts to recover, a renewed interest in selected equity themes might return, especially for high-conviction active and passive strategies.
Alternatives and investment solutions are expanding, benefiting both David and Goliath managers able to parcel out teams, brands, and products to provide adequate risk-based returns and exposure. However, blockbuster cash flows are raising key-man concerns for a variety of organizations.
As the investment industry focuses on capital preservation and income provision in an era of increased product complexity and market volatility, key factors for blockbuster success and strategic partnerships with institutions include clarity of investment process, simplicity of product positioning, organizational stability, superior client service, and recognized thought leadership.
Multi-convergence, discussed in my next column, is blurring lines of demarcation between retail/institutional, East/West, global/local regulation, and traditional/alternative vehicles, and will further accelerate the blockbuster phenomenon and global asset class shifts.
May we live in interesting times.
Daniel Enskat is Senior Advisor to Asset International and Founder of Enskat & Associates.