The Overblown Threat to Money Managers
The sound of sovereign wealth funds sucking money back home is whistling through the asset management industry. But the direst forecasts for asset managers may be overblown.
Sovereign funds have ballooned, from $3.3 trillion in 2007 to $7.2 trillion by the middle of 2015, according to the Sovereign Wealth Fund Institute, a research firm. At the end of 2014, SWFs -- many of them from commodity-rich countries -- had $1.9 trillion in equities, $900 billion in fixed income and short-term liquid assets and $400 billion in alternative investments, including real estate, hedge funds and private equity, according to a Bloomberg News report last month based on Moody's research.
With commodity prices now at miserable levels, there's plenty of concern that countries with large sovereign funds will raid these piggy banks, dragging down asset prices and money managers too. Saudi Arabia added more fuel to those worries last month with an austerity budget indicating both that oil may stay lower for longer and that Gulf state sovereign funds will come under pressure.
But some perspective is needed too. IMF researchers have estimated that about 42 percent of sovereign fund assets don't come from oil and gas economies. The Sovereign Wealth Fund Institute says external asset managers oversee only about 37 percent of the total pot, receiving about $14 billion of fees. Some of that money is locked up in long-term mandates that can't be canceled quickly.
Morgan Stanley analysts led by Michael Cyprys note that the large, public asset managers they cover oversee more than $750 billion of sovereign funds' money, equivalent to just 4.1 percent of their assets under management. And because big sovereign funds get a hefty discount on fees compared with other investors -- as much as 50 percent -- the impact of their redemptions on total revenue is greatly reduced. The analysts say that in "the extreme and unlikely'' event that sovereign funds yank every cent from external asset managers, earnings per share at those fund managers would take a hit of just 2.5 percent.
Of course, even if sovereign funds don't redeem their investments, they're likely to curtail new mandates, stemming what has been a steady stream of funds for the industry. When he warned of more redemptions in a Bloomberg Television interview last month, Aberdeen Asset Management CEO Martin Gilbert identified sovereign funds as a prime culprit.
It's hard to tell which firms are most exposed to outflows because neither the customer nor money manager typically discloses too much about the nature of their relationship. Morgan Stanley estimates Legg Mason and Ashmore are the firms with the largest proportion of assets from sovereign funds -- but it's still less than 13 percent of the pie for both of them.
To be sure, SWFs are creating other pressures on the money management industry. Several have started expanding their internal asset management teams, a trend that could speed up if they try to cut costs by reducing external fees. Disclosure about their holdings is also limited, so it's hard to gauge whether certain asset classes are overly exposed to their whims. Other money managers exposed to the same assets could be hit unexpectedly if those SWFs did head for the exit.
But it's important to put the risk of sovereign funds stampeding for the exit in some context. They're big, secretive and many of them have grown on the back of commodities that are now in the doldrums. So far, though, the impact on the asset management industry looks tolerable.
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