Active managers are adapting to the headwinds posed by the broad shift into index funds — but it’s not by providing better performance, according to a new report.
Instead managers are developing new products, focusing more on sales and marketing, and cutting costs, according to the latest quarterly asset management sector update from Moody’s Investors Service. Asset managers are also incorporating passive investments into strategies such as broad-based multi-asset investments and diversifying into higher-fee alternatives, such as hedge funds, Moody’s said in the report.
Flows into active strategies are on the upswing, but still weak. Overall, Moody’s rated outlook for the asset management industry for this year as stable.
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As of the first quarter, managers’ year-over-year earnings had grown 16 percent. But with volatility in the markets increasing, net asset flows were negative, with the industry losing $10.6 billion in the quarter, excluding BlackRock, which Moody’s said is continuing to grow thanks to flows into its ETF funds. That proved to be the weakest quarterly result in the past year. With the markets down, the total value of assets under management also dropped slightly as of the end of the quarter, Moody’s said in the report.
Active managers that have said performance will improve once volatility returns to the market were proved right. Large-cap equity funds outperformed benchmarks for the quarter, though the returns haven’t yet attracted new flows, Moody’s found.
Passive strategies continue to pose headwinds for the industry. On average, managers’ assets increased 19.5 percent year over year, but the 14.3 percent growth in revenue didn’t match that, reflecting the shift to low-cost index funds, according to the report.
Other moves in the first quarter included positive news for T. Rowe Price Group. The Baltimore asset manager’s assets reached $1 trillion for the first time. Flows into the firm’s multi-strategy funds, which include target-date retirement products, drove the growth. Assets increased 2.3 percent during the quarter.
Franklin Resources continued to decline. It lost 2.2 percent of assets across equity, fixed income, and multi-asset products.