Brand reputation, expertise can help smaller AM firms grow organically
Active funds have suffered almost $900bn in net outflows in the period running from 2014 through Q2 2019, forcing active asset managers to review their models and product offerings. At the same time, more than $1trn was poured into passive funds.
In its latest research, consultant Cerulli Associates assessed that active asset managers that are the best placed for sustained growth over the long term are these demonstrating an ability to focus on their core strengths.
The report revealed that 37% of active mutual fund families with $5bn or more in assets under management (AuM) had experienced positive organic growth during the preceding five-year period ending in the second quarter (Q2) of 2019.
The firms have been categorised as giant managers (firms with $200bn or greater in active mutual fund AuM), large managers ($50 bn to <$200bn AuM), mid-sized managers ($20bn to <$50 bn AuM) and boutique managers ($5bn to <$20bn AuM). According to Cerulli, the 12 giant managers control $6.9trn in active mutual fund assets and half grew organically over the past five years.
The trajectory of these giant firms could be a roadmap for the smaller firms to emulate their growth.
Asset News: What are the key drivers behind the growth of the larger firms?
Ed Louis: The AuM of the asset managers grew organically as they focussed on core capabilities. There are three levers driving this growth: strong brand reputation, reliability as service providers and investment management expertise. Coming out of the financial crisis, it was important for asset managers to build a strong brand reputation, entrenching themselves as trustworthy and reliable partners. As service providers, asset managers are valuable partners to financial advisers and home offices, offering resources to aid growth, for instance, tools and data to make better investment decisions or actionable practice management programme. Finally, the basic criteria – investment management expertise – of having core skills helped these firms grow organically.
What are the major challenges faced by the mid-sized managers and boutique funds?
Some challenges are same as the ones faced by the large and giant managers – rise of passive investment options, broker/dealer channels (B/D) and a lot more scrutiny of products, which is the biggest impediment. Boutique and mid-sized asset managers don’t have access to seed capital like that of giant funds, making it difficult to meet the higher minimum asset requirements of some B/D platforms. In addition, limited fund offerings can also affect these managers. Large firms, on average, offer 71 funds, thereby providing greater flexibility. But for mid-level managers (31 funds) or boutique firms (18 funds), removal of a single fund or if an asset class falls out of favour, they are vulnerable.
How are home offices influencing distribution strategies?
Asset managers of all sizes aim to strike a balance between the amount of resources allocated for interaction with home offices and advisors in the field. In terms of resources and outcomes, B/D channels have a greater control over decision-making. In fact, 45% of wirehouse advisors use home offices as a starting point before taking investment decisions or fully outsource to home-office models. These offices offer a leg up for the AMs in their models or recommended lists to secure positions in client accounts. Smaller asset managers that may be resource constrained can find themselves choosing between focusing on working with B/D home offices or instead allocating resources towards engaging with advisors in the independent channels. Asset managers of all sizes that are focusing on the B/D channels are building out their key accounts teams and professional buyer support to better engage with home offices.