Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Bull run no boon for innovation: BCG
The last ten years have seen much ado about the dominance of passive products over active managements, with ETF inflows swelling to titanic proportions amidst a decade-long bull run where even the least sophisticated investor was rewarded just for showing up. But the asset management industry is now emerging from an era in which “establishing a competitive edge has been a more complex task than it might appear on the surface.”
But the bull run has not been a boon for innovation, according to a new report from Boston Consulting Group. One would expect that the rivers of gold might flow to new destinations, but the majority of all global AUM in mutual funds and ETFs now sits in legacy products that boast high performance records. The outlook for such legacy funds has been so positive that there’s been no compelling reason to take a chance with never products that have no long-term track record, and almost 80% of all ETFs and about 60% of all mutual funds that were launched in 2018 closed by 2021.
Still, the passive uprising has given active managers more room to differentiate themselves. The industry is more fragmented than passive, where the top ten players have commanded 75 per cent of new capital over the last decade. By contrast, only a quarter of the positive net new inflows over the last five to 10 years have reached the top 10 players in active management, and the flight to passive only presents a real threat to consistent underperformers.
“There is a far greater variety of strategies for asset managers to use in the active space and, as indicated by the untapped potential in capital inflows, much more room to win,” the report says. “In our analysis of AUM and net flows, we have found that the winners in active products provide not just strong performance but also value for money.”
“…In short, when we follow the money, it becomes clear that there is plenty of room in the industry for skill and talent in active management, especially considering that the active space still represents 77 per cent of the asset management market.”
The strategies active managers are using to gain an edge are primarily in the alternatives space, which has already begun to experience a boom. Alternatives products represented more than 40 per cent of total asset management revenue in 2021, despite only comprising 20 per cent of global assets under management – and BCG anticipates that will grow to more than half of all global revenues, thanks in part to the higher fees that such products demand.
AUM in private equity products is likely to grow at a much faster rate than investment in more traditional assets, though equity and fixed income ETFs will grow at a similar pace, belying concerns about more muted returns in the public market – or at least retail investors’ concerns about them.
Asset managers that already specialise in alternatives are also eyeing the retail market – which has outpaced institutions as a source of capital, with global net flows of 6.6 per cent in 2021 versus 2.8 per cent from institutions – to maximise their returns, and are acquiring new distribution channels accordingly.
“These moves by large traditional asset managers that own distribution, and by specialized managers that manufacture investment products, have set the stage for a battle for alternative markets,” the report says. “On the horizon, then, we can expect to see stiff competition to elevate alternatives to mainstream asset status and bring them to retail investors. In addition to competition between firms, there is likely to be an increase in M&A activity and partnerships.”
