Institutional Assets Overtake Retail in 2023 for 1st Time in a Decade

U.S. retail client channels comprised $30 trillion in assets at the end of last year, while institutional assets hit $30.9 trillion, according to a new Cerulli report.

Institutionally managed assets have gained a slight edge over retail assets, due to retail having higher exposure to equities, as reported in Cerulli Associates’ “The State of U.S. Retail and Institutional Asset Management 2023” report.

Institutionally managed assets comprised $30.9 trillion at the end of 2022, compared to the $30 trillion making up retail client channels. The market share between the two segments were in parity from 2013 to 2022, according to the report, but diverged in 2022 when a weak equity market led to a larger asset decline for retail assets, as retail investors were more likely to have allocations to equities.

Cerulli analysts expect that trend to reverse in 2024, not just because of equity market performance, but also due to the growing popularity of retirement plan rollovers into adviser-managed individual retirement accounts. When combined with the increase in pension funds being frozen and terminated, which also will increase the growth of retail assets, retail is expected to grow faster than institutional channels.

Cerulli recommended that asset managers evaluating whether to service retail or institutional clients should foster relationships with the relevant professional buyers who will be making investment decisions. For retail clients, engaging with investment professionals at broker/dealers, banks and registered investment advisers should be a priority. On the institutional side, consultants, OCIOs, RIA retirement plan aggregators and third-party fiduciaries that work with defined contribution plan sponsors should be prioritized.

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“Asset managers cannot discount the role that intermediaries hold in distribution and should closely evaluate their sales and marketing resources to ensure coverage,” Powers continued.

Professionally Managed Assets

According to the report, there are $60.4 trillion in professionally managed assets as of year-end 2022. Professionally managed assets declined by 10.2% by the end of 2022, ending that year at $60.2 trillion, as a result of broad declines in the equity and fixed income markets. In 2022, retail client channels fell 11.2% to $29.5 trillion. Institutional assets declined 9.3% to $30.9 trillion.

Cerulli projects that the market split will shift toward retail as plan assets are rolled into IRAs and as corporate defined benefit plans freeze or are terminated. Between 2012 and 2021, the retail market share increased 9.3 percentage points to 49.4% from 40.1 %.

The three-, five- and 10-year compound annual growth rate of retail and institutional client assets were 5.8% and 3.6%, 8.2% and 4.2%, and 8.9% and 5.1%, respectively, according to Cerulli’s report.

Investment Product Vehicles

According to Cerulli, exchange-traded funds and separate accounts are more common with retail clients. Institutional clients have a greater focus on collective investment trusts, commonly among defined contribution plans.

The report found that demand for mutual funds is not decreasing, despite increased demand for other products such as ETFs, CITs and SMAs.

Retail clients own 80% of the $6.5 trillion of assets in ETFs, which are attractive to these clients because of their low cost, tax efficiency and intra-day tradability, according to Cerulli. The consultancy also noted this demand is not being translated to defined contribution plans, which do not encourage intra-day trading. Institutions rarely use ETFs as long-term investments, preferring them for tactical investments or cash management.

Despite a steep decline in assets in 2022, collective investment trusts are the fastest-growing investment vehicles, according to Cerulli. Demand for CITs is driven by their low cost and the ability to negotiate their fees.

CIT assets declined more than 15% in 2022 to $4.6 trillion but have a five- and 10-year CAGR of 8.6% and 8.3%, respectively, and have the fastest inflows of all investment vehicles.

Third-Party Distribution

Third-party intermediaries are important for asset managers to build relationships with, to ensure that their retail and institutional clients have access to their products and strategies. For retail clients, this means the availability of platform shelf space and model portfolio inclusion, according to the Cerulli report. DC plan menu inclusion and investment-consultant recommendation lists are sought after by managers with institutional clients.

The size of retail channel assets through third-party retail distributions was $22.6 trillion as of the end of 2022, the last year this data was provided. For institutional clients, this figure was $16.1 trillion. For retail clients, the market share of third-party distributors increased to 76.5% in 2022 from 73.2% in 2017. For institutional clients, this increased to 52% from 46.7%.

Correction: fixes year-end data date to 2022, not 2023.

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

Institutional Investors Seek Low-Risk Assets, More Diversified Portfolios

Tags: Asset Management, Brendan Powers, Cerulli Associates

The average funded ratio for American pension plans was 78.1% in the most recent fiscal year study, with $1.4 trillion in total unfunded liabilities.

Most state and municipal public pension funds are distressed or fragile, with funded ratios of less than 90%, according to the Equable Institute’s State of Pensions 2023 report, a year-end update.

The report used the last reported data available from public pension funds. The report noted that at least 33 funds have not released year-end fiscal 2022 data. The report tracked 232 pension funds in the U.S.

“Funding improvement in 2023 is both welcome and disappointing,” said the Equable Institute’s executive director, Anthony Randazzo, in a press release. “We are more than 15 years on from the financial crisis, lived through a zero-interest rate-fueled bull market, seen investments recover from a COVID shock, and watched public plan asset allocations shift steadily into alternatives like private equity and real estate—and still, the national average funded ratio is tepid with little sign that a strong recovery is on the horizon. Instead, we are seeing increasing valuation risk for public plan assets, a further search for investment returns by expansion into private debt, all while the total effects of inflation on pension funds are not yet fully known.”

At the end of fiscal 2023, the average funded ratio for public pension funds in the U.S. was 78.1%, up from 74.9% in fiscal 2022. Only six states/or jurisdictions had fully funded pensions (funded status above 100%): South Dakota, Wisconsin, Washington, Tennessee, Utah and Washington, D.C.

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Despite the gain, the overall funding status is still down from a high of 94.4% in 2001. Funded statuses declined sharply after the financial crisis of 2008 and 2009, dropping to 62.4% in 2009 from 92.4% in 2007.

The states with distressed status, which Equable defines as a funded status lower than 60%, include South Carolina (59.9%), Connecticut (57.8%), New Jersey (53.5%), Illinois (50.9%) and Kentucky (50.1%).

The report described pension funds with funded ratios of less than 90% as fragile. Only pension funds in 10 states and districts are considered neither fragile nor distressed, including the fully funded states, plus Nebraska, Wyoming, West Virginia and New York.

With most pension funds not fully funded, unfunded liabilities stand at $1.4 trillion as of fiscal year-end 2023, down from $1.6 trillion at the end of fiscal 2022, a high for unfunded pension liabilities. According to the report, state and local pension funds held $5.12 trillion assets, as of fiscal 2023.

The average fiscal year return for all pension funds in fiscal 2023 was 7.4%, higher than the average assumed rate of return of 6.9% for the year. According to the report, 53% of pension funds beat their average assumed rate of return, with actual returns ranging from negative 4.1% to 13.3%.