Asset management as an industry is becoming increasingly important for a variety of reasons:
- The world is getting wealthier, driven by growth in emerging markets. The growing middle class in China and India means that millions of people are purchasing wealth products, while new millionaires and billionaires are looking for high net worth wealth solutions from private banks such as UBS and Julius Baer.
- Entitlements and pensions in the first world are faced with unfavorable demographics, low interest rates, and higher demands from pensioners.
This bodes well for those looking to work in asset management. There are likely to be many more investing and support jobs at global giants such as BlackRock and Fidelity, alternative asset managers such as Blackstone and Apollo, the big banks such as RBC, PH&N and TD Asset Management as well as at boutique outfits.
Here are some trends that would be good to keep on top of.
Funding Shortfalls and Prescriptions
Public sector pension funds do not have enough assets to satisfy their obligations under any realistic expected return measures. Pension service costs and interest costs (rating agencies and most good credit analysts consider pension obligations to be a debt-like liability) are outstripping returns on plan assets and creating a deficit, which must be funded by debt. In Canada, there is an implicit backstop for the heavily indebted provinces – most investors expect the Federal government to bail out provinces should they run into difficulties with their payments. In the US, no such implicit guarantee exists, and several States are on watch. Asset managers are increasingly given new mandates to take on more risk to meet returns that are required to match the cost of liabilities.
Shifting Global Landscape
Sovereign wealth funds are also looking for more aggressive growth and diversification, especially when a large source of country income and taxation is derived from a particular industry (noticeably Saudi Arabia and Norway, where oil production plays a large part in each economy). Sovereign wealth funds are increasingly turning to best-in-class asset managers from both a traditional (BlackRock) and alternative (Blackstone) background to help achieve these goals. This strategy, paired with structural changes driven by government policy (education, energy) is designed to position a country for the next generation.
Smart Beta and Robo-advisers
A host of alternative investing options have appeared alongside improvements in technology.
Smart Beta is an adjustment to beta exposure (replicating an index) by looking for efficiencies to add value (alpha) or meet a mandate. A simple example would be taking the S&P 500 and taking out all of the high volatility stocks.
Robo-advisers automatically adjust an individual’s portfolio based on configurations set by the individual. Generally, most of them use asset allocation strategies that will shift the portfolio based on how much risk it deems the portfolio can take. The major players in this space are Wealthfront and Betterment. These are tailored towards US tax and legal structures. Canadians do not have a prominent robo-adviser yet, but banks are looking to get into this space (BMO, TD, and Alberta Bank).
Today, the world’s markets are becoming increasingly accessible via several ETF platforms and discount brokerages. Investing is no longer a rich man’s hobby and people do not have to go through their banks.
The Rise of Passive Asset Management
Money has been flowing in large volumes out of actively managed funds (the average mutual fund) to passive index funds provided by firms like Vanguard and BlackRock. More investors are questioning the high fees charged by mutual funds when holdings do not vary that much from the index and alpha is not generated or is negative; the average mutual fund does not outperform the stock market index. Additionally, the cost of holding an index is becoming cheaper. Vanguard and BlackRock continue to reduce fees as they can make money by lending shares to short-sellers and collecting carry (securities lending).
However, given that stocks are starting to move in tandem due to this trend, the opportunity to outperform using active management will become easier in time. Nonetheless, there will be much more bleeding from the active management sector, shuttering of firms, and mergers before this becomes obvious (a recent example being Bill Gross of ex-PIMCO fame having his Janus Capital Management consolidate with another hedge fund for cost and network synergies).
We have prepared a Brief Guide to Asset Management, you can download it now.
Jason Oh is a management consultant at Novantas with expertise in scaling profitability for retail banks (consumer / commercial finance) and diversified financial service firms (credit card / asset management / direct bank).
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