A new generation of asset management CEOs has called off a “golden decade” for their industry, warning that it is becoming increasingly difficult to navigate the competitive pressures of markets, regulators and politicians.
“The complexity of an asset manager’s claims is clearly increasing,” said Ali Dibadj, chief executive of Janus Henderson. “Customers are asking all of us for more, regulators are asking all of us for more, and our customers’ customers are asking for more of us.”
Katie Koch, chief executive of Los Angeles-based TCW Group, said asset managers “faced increasing complexity around evolving regulation, the migration of investment opportunities from public to private markets , the globalization of the opportunity set and the latest politically charged portfolio management environment.” .
After a decade of zero rates and quantitative easing that sent stock markets to record highs, investors are faced with the challenge of a regime shift toward higher inflation and higher interest rates.
“Asset management used to be a rising tide lifting all the boats and that’s not the case anymore,” said Yie-Hsin Hung, chief executive of State Street Global Advisors.
The Financial Times identified at least 18 CEOs who have taken the reins of large asset managers since the start of 2022. This new guard is charged with stabilizing their businesses after the worst year for the roughly $60 trillion industry since the financial crisis. .
Large declines in markets combined with investor exits and spiraling costs, adding to the pressure on active asset managers who have been battling the Passive investing march.
Investors around the world pulled $530 billion out of mutual funds (excluding short-term money market funds) last year, the worst in the start-up fund industry since 2008, according to data provider Morningstar. .
Investment managers’ incomes are supported by fees they charge on assets under management, and falling assets are putting pressure on cost-to-income ratios, a key measure of investment managers’ profitability, especially for less efficient players.
“The golden decade of asset management is over,” said Stefan Hoops, chief executive of DWS, adding that investors now face a market environment in which “not everything goes up and up and up”, but “ costs yes.
Last week, BlackRock, the world’s largest asset manager, warned that the “traditional investment approach” of 60 percent stocks and 40 percent fixed income misserve investors long-term, ending a strategy that has been the cornerstone of many asset managers for more than 30 years.
“The complexity of the markets right now, not just stocks and bonds, but also consumer behavior, the economy, geopolitics and regulation, is creating a lot of volatility and uncertainty,” said Andrew Schlossberg, chief executive of Invesco. “That makes creating a long-term business strategy challenging and we think it will be with us for a while.”
Asset managers have responded to profitability pressures by trying to diversify their businesses, adding higher-margin products such as private assets, or targeting new customer types or geographic regions, sometimes through acquisitions. As a result, their business models have become increasingly elaborate and difficult to manage.
“The challenges of complexity are greater than the challenges of scale,” said Rob Sharps, CEO of T Rowe Price. Clients now come to T Rowe through multiple channels, including direct access on brokerage platforms, through advisors, or to purchase specific products as alternatives. “Then we do that all over the world.”
He added: “It becomes a tricky business, especially with the proliferation of regulations and differing customer preferences for vehicles, strategies or structures in end markets.”
Increasingly fragmented and complex regulation is another area of concern, particularly around the fast-growing sector of investment based on environmental, social and governance factors. Asset managers are trying to balance the demands of a highly interconnected investment industry with the retreat from globalization and the increasingly politicized nature of ESG in the US.
“Regulation is getting a lot more complicated,” said Matthew Beesley, Jupiter’s chief executive. “Regulatory pressures have increased in all regions. We are also seeing emerging regulatory divergences within Europe following the UK’s departure from the EU.”
For example, European regulators took the lead in defining standards for ESG investing, with the Sustainable Finance Disclosure Regulation, which aims to improve transparency and prevent greenwashing. But the UK is consulting on its own version of the rules, which could take a different approach to the EU post-Brexit, and the US Securities and Exchange Commission is preparing rules on ESG disclosures.
Karin van Baardwijk, chief executive of Dutch asset manager Robeco, said that with the growing demand and associated supply for ESG products, “the risk of greenwashing is becoming more prevalent. This can damage the credibility of our industry as a whole. . . and ultimately will lead to more regulation.”
In the US, asset managers including BlackRock and Vanguard are becoming a lightning rod for both sides of the political spectrum. Republican politicians are attacking them for their use of ESG metrics, claiming they are hostile to fossil fuel investments, while Democrats have criticized them for not doing more to combat climate change.
Meanwhile, asset managers are locked in a war for talent, especially in areas like private assets, technology and sustainable investing, and are trying to keep investing in their businesses to stay ahead of the competition.
“Cost pressure, wage inflation and the war on talent really are here to stay,” said Naïm Abou-Jaoudé, chief executive officer of NY Life Investment Management.
“And the pressures we have on regulation, compliance and all the requirements mean that the business is becoming more demanding. . . all of this is costing a lot in terms of investment to be really efficient as an organization.”
All the CEOs agreed that today’s investors face a quite different future than their predecessors in recent decades.
To navigate this more complex environment, asset managers “will have to work harder and be even more innovative. . . operating through traditional silos,” according to Marc Nachmann, global head of asset and wealth management at Goldman Sachs.
“Longer relationships and resources, distributed globally and amplified by better technology, will be increasingly needed for idea generation, deal sourcing, portfolio building and value creation,” he said. “These are not small investments to make.”