How Bad Was 2022 for Asset Managers? Assets Dipped 10%

Thus far this year, the recovery is muted, a McKinsey study finds.



Last year was a bummer for asset managers, with assets under management dropping 10% and profit margins off five percentage points from 2021, according to a McKinsey & Co. study, and the recovery in 2023’s first half was muted.

Escalating interest rates—the key impetus for 2022’s suffering in stock and bond markets—as well as this year’s volatility, mean the asset management “industry is undergoing structural adjustments,” the report found. A substantial chunk of allocators’ AUM is run by these managers, although less than in the past.

Hardest hit were equities with stronger net outflows of assets from active managers, accelerating a trend that had been brewing for a while. Some of that money went into low-fee index funds.

For fixed income, assets also fled active managers last year and inched back a tiny bit in this year’s first half. Fixed-income passive strategies’ inflows remained positive for both years. The big gainers, both in 2022 and 2023, are private alternatives: private equity, private credit and the like.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Meanwhile, there is an “increasing wedge between the industry’s haves and have-nots” among asset managers, McKinsey stated. Only 29% of asset managers generated positive net flows in both 2022 and the first half of 2023, as the portion of struggling firms increased to 42%.

Profit margins have declined, although, relative to many other industries, they are still rich. Last year, pretax operating margins fell to 34% from 39%. No numbers were available for 2023.

The study termed the state of the industry as “down but not quite out.” The 10% falloff in AUM last year is far more than in past contractions, it contended. Some of the problem is an inflexible cost structure, the report noted. The industry’s cost base shrank only 3%, not enough to offset the margin drop.

One antidote, in McKinsey’s eyes: “Asset managers need to modernize their distribution, making sales and marketing a competitive differentiator by using non-traditional data, digital tools and gen AI for certain tasks.”

Asset managers will rise again, McKinsey averred: The industry downdraft “presents an unparalleled opportunity for asset managers to expand their roles as financial intermediaries.”

Related Stories:

World’s Largest Asset Managers Lost $18T in 2022, According to WTW

Asset Managers See Further Potential in Private Credit Market

Mature Asset Managers Increase Hedge Fund Market Share to 84%

Tags: , , , , , , , , ,

Why Tech Rally Will Spread Beyond Magnificent 7

The top stocks will get company as the rest of the technology sector joins in amid AI mania, says Wedbush’s Ives.


The Magnificent Seven, the tech darlings that have driven the current stock market rally, are great. But investors will broaden their tech appetites beyond those hard-charging stocks.

That is the view of Dan Ives, the well-regarded tech analyst at Wedbush Securities Inc. The Magnificent Seven leapt 71% in 2023 through mid-November, by Goldman Sachs’ estimate. The S&P 500 Index as a whole was up 18% as of Wednesday. But the seven’s contributions to the market’s advance is outsized, as the rest of the index’s increase would be minuscule without the Mag Seven, per a Nasdaq analysis.

Some strategists doubt that the seven stocks can keep up their pace. “They won’t be able to sustain this growth,” says Neil Hennessy, chief market strategist at Hennessy Funds. Goldman has reported that hedge funds are trimming their positions in tech, considering the sector overbought.

In Wedbush’s view, however, the breakthroughs in artificial intelligence and the movement of data to the cloud will power the seven and other tech providers even more. “Heading into 2024 we believe the tech sector is set up for an acceleration of spending around cloud and AI that we believe is being significantly underestimated by [Wall] Street,” analyst Ives wrote. the enthusiasm will then “spread like brushfire” beyond the seven top tech stars.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

This year, the Mag Seven have each posted stock-price hikes well ahead of the performance of the overall tech sector overall, which is up 50%, according to Yardeni Research. The best performer of the seven is Nvidia, ahead 236%, with Meta Platforms in second place at 166%. The worst is Apple at 51%.

To be sure, some tech names with AI or cloud bona fides have already done extremely well, on par with the best of the Magnificent Seven. Ives has pointed to five outside of the storied leaders.

CrowdStrike Holdings Inc., for instance, has surged 125% this year. It specializes in endpoint security, protecting devices such as servers and laptops that are linked into networks. Another big gainer outside the charmed circle is MongoDB Inc. (the name is derived from the word “humongous”), which crunches major data for businesses. Its stock has vaulted 120%.

In fairness, these five either are unprofitable (CrowdStrike and Mongo) or have stratospheric multiples. Cybersecurity firm Palto Alto Networks, another of Ives’ picks, has a price/earnings ratio of 162. The Mag Seven, all in the black, sport P/Es that range from Tesla at 78 down to Google-parent Alphabet at 26.

Of course, numerous unheralded, if promising, alternatives exist in the tech realm. The InvestorPlace stock website recommends three, including Global Payments, which provides computer services to retailers but is harmed by the end of the stay-at-home e-commerce boom. It is down 50% from its 2021 peak. Earnings per share, though, have risen 12% this year.

As a result, Ives declared, “the fundamental tech growth stories/use cases are accelerating.”

Related Stories:
Tech Stocks’ Multiples Too Rich to Keep Fueling S&P 500 Rise, Says Sage

Hard-Charging Tech Stocks May Slow for the Rest of 2023, Ned Davis Says

Why Big Tech Earnings May Trigger a New Stock Surge for the Sector

Tags: , , , , , , , , , , , , ,

«