Asset Managers Pin Hopes on a Comeback for Active Management

With margins on the decline, fund managers are betting on investors returning to active strategies.

Illustration by II

Illustration by II

Asset management margins aren’t expected to get better any time soon.

A survey of nearly 2,000 buy-side professionals revealed low expectations for fee income growth, with respondents projecting revenues from fees to increase by just 8 percent by 2025. Assets under management, meanwhile, are expected to grow by 21 percent over the same period, according to the survey by Bloomberg Intelligence and law firm Simmons & Simmons.

The result: An 11 percent decline in fee margins over the next six years.

The institutional fund managers, alternatives investors, and wealth managers surveyed for the report suggested that the costs of compliance, new investments in technology, and big data initiatives could further squeeze profitability. Overall, the ratio of costs to income was expected to rise by 3 percent by 2025.

In response to these pressures, survey respondents are intending to double down on the products which produce the most fee revenue. Asked their most likely course of action, twenty-seven percent said they would expand their offerings into alternative investments, while 19 percent intended to focus more on actively managed strategies.

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“Given the industry’s recent shift to lower cost, passive products and increasing automation, the expectation that clients will start allocating to higher margin business – active investment strategies and alternative assets – could be seen as an expression of hope over experience,” the report stated. However, the report’s authors suggested that recent bond market trends indicated that investors could be nearing a “turning point at which investors re-allocate to assets – such as equities – for which active managers are historically well-suited to generate alpha.”

Either way, survey respondents believed new products would be the biggest driver of assets under management, followed by technology and expansion into other geographic markets.

On the other hand, managers said geopolitical issues such as Brexit and trade wars could be detrimental to asset growth. The biggest detractor cited by the survey respondents, however, was competition from new entrants to the industry.

“Asset managers recognize that it will be challenging to maintain [assets under management], particularly in light of regulatory reform and supervisory scrutiny,” said Sarah Jane Mahmud, a senior regulatory analyst at Bloomberg Intelligence, in a statement Wednesday on the findings. “Their response to those challenges will dictate the evolution of the industry.”

Among the asset classes predicted to be the most attractive over the next six years were equities and infrastructure, with alternatives managers most favoring environmental, social, and governance strategies and impact investing. Traditional fund managers, meanwhile, expected to develop more exchange-traded products, likely focusing on actively managed ETFs, according to the report.

At the other end of the spectrum, traditional managers said they planned to move away from high-yield corporate bonds, while alternatives firms expressed declining interest in private equity real estate, mezzanine and distressed debt strategies, and collateralized debt and loans.