Are Bull Markets Coming To An End and Will This Affect Asset Managers?

Money managers, who across globe control circa USD100 trillion, have seen an unprecedented outflow of investor funds. One global asset manager based in the United States has seen an exodus of funds amounting to USD127 Billion in the last 24 months. Indeed, within this industry money managers have over the past 10 years faced a massive shift in investor sentiment who have moved to more passive and cheaper investment strategies.

Sadly, these money managers are now facing what may be the end of a mammoth bull run, which has not only masked deep vulnerabilities within the industry but have kept their investments afloat. According to data released from a well know consulting company, in the last 17 years circa 90% of additional revenue received by these money managers has not been from their ability to attract new clients but simply from rising markets. Experts suggest that if there is one more bear market, many of these companies will turn from a slow decline to an impending crash.

Industry experts point out that many of these companies have been literally coasting for years. The coasting is now coming to a stop and if they do not change the consequences will be extremely dire. The salient facts are that amount of client cash that has headed out through the doors of companies such as Invesco Ltd, Janus Henderson Plc, Abrdn (formerly Standard Life Aberdeen Plc, the largest active asset manager in the UK), Franklin and T.Rowe has been in excess of USD600 Billion. Taking these companies as a benchmark for the huge middle of the industry and as proof the world is no longer buying what they are selling, just look at the amount of client funds that have haemorrhaged over the past 10 years.

Experts advise the above five firms represent the pick of the bunch for the middle tier of this industry and as of June 30th, 2023, recently released data confirms that between them they oversaw USD 5 Trillion in assets under management (AuM). However, to show which way the wind is blowing within these companies, whilst the S&P 500 has increased in value by 60% since 2018, with the exception of T.Rowe Price, the other companies have lost circa 33% of their value.

Added to these current problems the industry is still reeling from higher interest rates becoming the norm and the geopolitical tensions between the West and Russia and China. Even Blackrock one of the industry’s leaders has not been immune from the exit of funds as in July, August and September of this year clients pulled a net USD13 Billion from their long-term investment funds. Larry Fink, the CEO of Blackrock was quoted as saying, “Structural and secular changes in business models, technology and most of all, monetary and fiscal policy, have made the last two years extremely challenging for traditional asset management”.

Currently the downward trajectory looks like it will not be changing course anytime soon, and regardless of whether markets are going up or down, passive products* seem to be the favoured by many investors, so they are gaining a lot of traction. Interestingly, as of 30th June 2023, passive investments in mutual funds and ETFs in the United States accounted for 50% of all assets, up from 44% in 2021 and 47% in 2022, whilst 10 years ago it accounted for circa 27%. Essentially investors are ditching those mutual funds with active investments and are joining those with passive strategies which are largely managed by the big companies being Vanguard Group Inc, State Street Corp and Blackrock Inc. Furthermore, there is one more problem money managers have to contend with, and that is cash, and with interest rates remaining high many investors wish to keep money in cash deposits and other similar money market products.

*Passive Products – Passive investing basically refers to a buy and hold strategy for long-term investments, coupled with minimum trading in the market. The most common form of passive investing is Index Investing**, whereby investors seek to replicate and hold a broad market index or indices. Passive investment seeks to avoid fees, is less complex, involves limited trading and therefore is cheaper than Active Products***. The underlying assumption of a passive investment strategy is that over a period of time the market will return positive results.

**Index Investing – This can be an index mutual fund or ETF (exchange traded fund), that tracks a specific market benchmark such stocks and shares in the FTSE 100, the S&P 500, Dow Jones Industrial Average, Nasdaq Composite and the Russell 2000. Other indexes outside the stock market that funds follow are commodity benchmarks such as S&P GSCI Index, the Bloomberg Commodity Index, and the DBIQ Optimum Yield Diversified Commodity Index. These are just three examples pf many commodity indexes that are available to investors. These market indexes make it easy to understand whether the market as a whole, be it stocks or commodities, is gaining or losing ground.

FTSE 100

The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index the FTSE 100 or informally known as “the Footsie” is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.

S&P 500

The Standard and Poor’s 500 or known as the S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in America.

Nasdaq Composite

This is a stock market index that includes almost all the stocks listed on the Nasdaq Stock Exchange. Along with the S&P 500 and the Dow Jones Industrial Average it is one of the three most-followed stock market indices in America.

Dow Jones Industrial Average

Simply known as the Dow Jones or the Dow, this is a stock market index of 30 prominent companies listed on stock exchanges in America.

S&P GSCI Index

This index serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradeable index that is readily available to market participants of the Chicago Mercantile Exchange

The Bloomberg Commodity Index

This index is a broadly diversified commodity price index and distributed by Bloomberg Index Services Ltd.

DBIQ Optimum Yield Diversified Commodity Index

DBIQ stands for the Deutsche Bank Index Quant and this index is the Excess Return Index which is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world.

***Active Products – Active investing is an investment strategy where traders, money managers and their ilk trade on a frequent basis which requires a constant hands-on approach. Active investing requires the knowledge and expertise to buy into or sell out of a particular asset, bond or share. There are usually a team of analysts who look at quantitative and qualitative factors who use established criteria and metrics to help decide whether to buy or sell. All of these factors add up to active investment being more costly than passive investment. Active investing is particularly attractive during times of market upheaval, and unlike passive investing where the goals are to match the market, active investment’s aim is to outperform the market.

Looking back to the beginning of 2023 data released shows that the active funds did not perform as usual during an upheaval in the market. Indeed, in Q1 the extreme volatility that occurred due to a banking crisis, enhanced geopolitical problems and rate hikes should have produced rich pickings for the active side of asset management. However, according to data released by a US Bank, two thirds of actively managed US large cap funds underperformed their benchmark, the worst quarterly figures since Q4 of 2020.

Experts are even suggesting that many asset managers in representing the middle of the industry may not survive a bear market. A well-known internationally recognised accounting company recently suggested 16% of existing asset and wealth management (AWM) companies and organisations will have been swallowed up or disappeared by 2027, which is twice the historical turnover. In 2022 asset managers had a very tough year with funds or assets under management (AuM) falling by just under 10% from a high in 2021 of USD 127.5 Trillion to USD115.1 Trillion which represented the greatest decline for 10 years. Experts suggest that the during the next two years two of the biggest problems for asset managers and investors will be market volatility and inflation. However, it is estimated that a rebound may well occur in 2027 with assets under management reaching a base case of USD147.3 Trillion being an Annual Compound Growth Rate (CAGR) of 5%.

It has been 14 years since the Global Financial Crisis of 2007 – 2009 and since 2011 the world has enjoyed over a decade of low interest rates and financial stability. Today the world is a different place with high interest rates* and an uncertain economic environment, such trends are somewhat alien to many working in the asset management industry and who are therefore light on experience. Furthermore, as mentioned above, this environment may well be prolonged by the current geopolitical instability plus labour shortages. The problem is that money mangers whilst coping with these problems will have to focus on new investment decisions needed to bring growth and long-term viability which currently, they are failing to do.

*High Interest Rates – Athens Thursday October 26th, 2003, the European Central Bank (ECB) governing council in a unanimous decision held the benchmark rate unchanged at 4%, bringing to an end its unprecedented streak of 10 consecutive rate increases that started in July 2022. However, this rate is still 4.5% higher than the all-time low of minus 0.5% and the decision comes a week ahead of Bank of England and the US Federal Reserve decisions where interest rates are expected to remain steady.

With regards to the markets, the bulls are confident of another run, however despite some bullish signs many investors are saying that the math is not adding up to an on-going rally, especially as there are prospects of a recession on the horizon. Furthermore the 2-year and 10-year Treasury yields remain inverted. An inverted Treasury yield occurs when short-term interest rates exceed long-term interest rates. Under normal circumstances, the yield curve is not inverted since debt with longer maturities typically carry interest rates that are higher than shorter term maturities.

But why are inverted yield curves considered prescient, it is because historically they have been a precursor (not always) to a recession. If indeed there is a recession, (Germany for example is already experiencing a recession), then some of the middle tier money managers had better watch out, as a recession inevitably means a bear market and as explained above a number of middle tier companies could disappear completely