Asset Managers With $74 Trillion on Brink of Historic Shakeout

By Suzy Waite, Annie Massa and Christopher Cannon

August 8, 2019, 12:00 AM EDT

The industry that gave rise to investing titans Peter Lynch, Bill Miller and Bill Gross is facing an existential crisis.

For years, mom-and-pop investors frustrated by high fees and subpar returns from big-name money managers have been shifting their savings into ultra-cheap funds that simply mimic the returns generated by benchmark stock and bond indexes. Passive investing, as it is known, was in. Active was out.

At first, few noticed the trickle of money out of funds run by star money managers into cheaper index products. But now, no one can ignore the flood. The exodus from active funds has sent fees inexorably lower, led to the loss of thousands of jobs and forced large-scale consolidation among firms. That’s pushing the industry, with $74 trillion in assets as measured by Boston Consulting Group, towards a shakeout where only the strongest will survive.

“We’re clearly at a watershed moment,” said Philip Darling, head of partnerships at The Buy-Side Club, a consultant to the investment management industry.

Survival of the Fittest

The largest managers have been able to boost assets in a competitive market. 👆 for additional data on assets under management and net flows.

Companies sized by their 2018 assets under management, colored by change in AUM from 2014–2018:

–10

+100%

$20.7T

U.S.

Vanguard

Pimco

T. Rowe

Price

Affiliated

Managers

Capital

Group

Fidelity

Invesco

Legg

Mason

BlackRock

Franklin

Templeton

$4.7T

Europe

Standard

Life

Aberdeen

Man

Group

Baillie

Gifford

GAM

Anima

SGR

Amundi

Schroders

DWS

Janus

Henderson

Ashmore

Companies sized by their 2018 assets under management,

colored by change in AUM from 2014–2018:

–10

+100%

$20.7T

U.S.

Pimco

Invesco

Fidelity

Vanguard

Affiliated

Managers

BlackRock

T. Rowe

Price

Capital Group

Franklin

Templeton

Legg

Mason

$4.7T

Europe

Man Group

GAM

Standard

Life

Aberdeen

Baillie

Gifford

Anima

SGR

Amundi

Ashmore

Schroders

Janus

Henderson

DWS

Companies sized by their 2018 assets under management, colored by change in AUM from 2014–2018:

–10

+100%

$20.7T

U.S.

$4.7T

Europe

Vanguard

Man Group

GAM

Pimco

Baillie

Gifford

Standard

Life

Aberdeen

T. Rowe

Price

Anima

SGR

Amundi

Ashmore

Affiliated

Managers

Schroders

Fidelity

Capital Group

Janus

Henderson

DWS

Franklin

Templeton

Invesco

BlackRock

Legg

Mason

Companies sized by their 2018 assets under management, colored by change in AUM from 2014–2018:

–10

+100%

$20.7T

U.S.

$4.7T

Europe

Pimco

Invesco

Man

Group

GAM

Fidelity

Baillie

Gifford

Standard Life

Aberdeen

Vanguard

Anima

SGR

Amundi

Ashmore

Schroders

Affiliated

Managers

BlackRock

Janus

Henderson

DWS

T. Rowe

Price

Capital Group

Franklin

Templeton

Legg

Mason

Note: This analysis focuses on asset managers without a major banking or insurance affiliation, excluding not only commercial and retail banks but also so-called custody banks like State Street Corp. All data is for calendar years except for Legg Mason Inc. (fiscal year ending March 31) and Franklin Templeton (fiscal year ending Sept. 30). All non-U.S. dollar figures are converted as of the last day of the respective year for assets under management and using the average exchange rate of the respective year for net flows. Total assets under management by region may differ slightly from firm totals due to rounding.

Sources: Bloomberg reporting and company data

To understand how that moment will play out and who the winners and losers will be, Bloomberg News drilled into fee, personnel and performance data across the industry. The analysis reveals just how unforgiving the environment has become for active fund managers that lack scale or a compelling raison d’etre.

The combination of fee competition, rising costs and asset growth is creating never-before-seen pressures on asset managers, said Ben Phillips, principal and investment management chief strategist at consulting firm Casey Quirk, a unit of Deloitte Consulting LLP.

“That creates a really bitter cocktail for an industry that never had to worry about fixed costs, fees or money showing up,” Phillips said. “The entire industry has been caught flat-footed. Nobody saw it coming. That sounds a little glib, but nobody acted to get around the corner first.”

Investors have responded by stampeding into passive investments in recent years. Index funds are poised to overtake active management in the U.S. by 2021, according to estimates issued in March by Moody’s Investors Service.

Note: Boxes are sized by 2018 assets under management in each region. Asia figures include Japan.

Source: Morningstar Inc.

The idea that active investing can be overrated certainly isn’t new. Burton Malkiel, the Princeton University economist who wrote the 1973 investing classic “A Random Walk Down Wall Street,” famously compared the prowess of money managers to a blindfolded monkey throwing darts to pick stocks. Jack Bogle, the late founder of Vanguard Group Inc. who popularized index funds, was insistent that most active managers weren’t worth the fees they charged.

Note: Based on five-year returns through Dec. 31, 2018, relative to the S&P 500 and S&P Europe 350.

Source: S&P Dow Jones Indices

But the idea didn’t really garner widespread attention until shell-shocked investors evaluated the damage to their portfolios after the 2008 financial crisis. Even when markets bounced back after hitting their trough in early 2009, many managers couldn’t recover.

Legg Mason Inc.’s Miller, who beat the S&P 500 for a record 15-year streak starting in 1991, hit a rough patch and failed to beat the Legg Mason Value Trust’s benchmark index for four out of five years after 2005. He was never able to come close to matching his previous feat. Gross retired this year after failing to live up to a stellar four-decade career that earned him the title of “bond king.”

Scale Game

In this new environment, the beneficiaries have been the world’s largest asset managers, who are wielding far more influence and increasingly attracting a larger share of investor money. They’ve been able to take advantage of their size to keep overall expenses down and help make up for lower fees. Crucially, they’re also the most likely to be offering both passive investments as well as actively managed funds. That means the biggest firms are just getting bigger: The two largest U.S. indexing titans—BlackRock Inc. and Vanguard—oversee combined assets of around $12 trillion this year, up from less than $8 trillion just five years ago.

Fidelity Investments once boasted the world’s largest mutual fund. But the Fidelity Magellan Fund that stock-picking star Lynch propelled from a $20 million offering into a multibillion-dollar behemoth is not even in the world’s top 25 mutual funds today, according to Morningstar. In a sign of the times, only three of the top 10 funds worldwide are actively managed funds, Morningstar data show.

[This is] a really bitter cocktail for an industry that never had to worry about fixed costs, fees or money showing up.

Below the top rung, firms such as Legg Mason and Franklin Resources Inc. have joined a parade of managers wringing out savings by trimming staff. Others are consolidating with mixed results. Janus Henderson Group Plc and Standard Life Aberdeen Plc have both pursued mergers to boost assets, although neither have been able to stanch outflows since their tie-ups.

In Europe, only one firm has surpassed the coveted $1 trillion milestone: Amundi SA. Yet it’s still dwarfed by BlackRock’s $6.8 trillion in assets under management, as of June of this year.

Note: Total assets under management by region may differ slightly from sector totals and percentage shares may not add up to 100 due to rounding.

Sources: Bloomberg reporting and IPE research

Europe’s fund industry has remained fragmented, in part, because it’s dominated by divisions of banks and the link hasn’t been an advantage as the financial firms focused less on building their fund units and more on averting crisis after crisis.

“Should all active managers survive?” said Kathrin Hamilton, a partner at Baillie Gifford, an Edinburgh-based investment manager. “A lot of firms have been focusing on accumulating assets rather than delivering outcomes for their clients. If there is indeed a shakeout, let’s not assume that’s a bad thing.”

Fee Pressure

As the competition for assets has gotten increasingly intense, fund managers have been locked in fee wars that have pushed fund charges closer to zero for exposure to broad indexes. In a move that drew particular attention last year, Fidelity unveiled four index mutual funds with no annual fees.

Some of the relentless pressure has come from firms such as Vanguard, which offers among the cheapest indexed products on the market. Competitors like BlackRock, the world’s largest issuer of ETFs with more than $2 trillion in its iShares products, have the scale to offer products that charge less than $1 for every $1,000 invested.

“The entire financial sector is being challenged by pressures on margins and this trend is going to continue due to very low interest rates,” said Yves Perrier, chief executive officer of Amundi. “The industry is also being challenged by the development of passive management.”

U.S. open-end mutual funds and exchange-traded funds saw a 6% fee decline in 2018 compared with the year before, Morningstar data show, resulting in $5.5 billion in savings to investors last year. It was the second-largest annual decline Morningstar has recorded since it began tracking trends in U.S. fund fees in 2000.

Investors are paying roughly half as much to own funds as they were nearly two decades ago and about a quarter less than five years ago.

If there is indeed a shakeout, let’s not assume that’s a bad thing.

Yet even active funds that beat the market are having a difficult time in the current climate. Take, for instance, one of the largest, the $120 billion-plus Fidelity Contrafund, which outperformed its benchmark, the S&P 500, for nine of the past 10 years, but has still seen more than $90 billion in net outflows since 2009. A possible beneficiary is Fidelity’s S&P 500 index fund, which has seen net inflows of more than $120 billion during the same period. The key difference: Contrafund’s fees have been as much as 10 times higher than its passive counterpart.

Note: Data is through the end of June 2019. Cumulative returns are relative to the first trading day of 2009 and assume dividends are reinvested. The expense ratio displayed for the Fidelity 500 Index Fund is for the Investor fee class, which was 0.30% in 2018 as compared to 0.15% for the Institutional fee class. Flows are estimates as calculated by Bloomberg based on the change in assets not attributed to performance, dividends and fees.

Sources: Bloomberg and company data

It’s not just investors taking note of whether money managers are worth what they’re charging: the U.K.’s Financial Conduct Authority said it will look closely at underperforming active funds in its next annual report to shed light on whether they’re giving value to investors.

As scrutiny has intensified, some money managers are increasingly trying to justify their fees by pushing into ill-advised investments holding the promise of higher returns. Neil Woodford, the British star fund manager who made middle-England rich, barred withdrawals from his flagship fund when investors started asking for their money back faster than he could unwind illiquid holdings. Investors fled Natixis SA’s fund affiliate after Morningstar questioned the “liquidity and appropriateness” of some bond holdings. These risks further threaten to erode investors’ faith in active managers.

Fallout

The sweeping changes coursing through the industry have exacted a human toll. Investment firms have slashed hundreds of jobs this year, with many turning to machines to help automate functions and cut costs. Legg Mason is cutting about 120 positions, or 12% of its staff, as it works to cut costs and increase profitability. In January, BlackRock said it would cut 500 jobs, in what amounts to the biggest headcount reduction since 2016. That same month, State Street said it planned to dismiss 1,500 workers.

Top executives haven’t been immune to the shakeout either. The changes have been especially striking in Europe: This year alone, more than 10 new CEOs have been installed at Europe’s fund firms. More than half of the CEOs at large asset managers globally took their roles in 2014 or later, according to a Casey Quirk report.

Note: State Street Corp. is the parent company of State Street Global Advisors.

Sources: Bloomberg and company data

“The turnover of CEOs and leadership at asset managers has never been higher,” said The Buy-Side Club’s Darling. “And the main reason is because the leadership that’s required for the rapidly evolving landscape is not present at all the firms right now.”

Merger Meltdowns

While BlackRock created the template for the mega merger in 2009, when its acquisition of Barclays Global Investors made it the world’s largest money manager, consolidation has proved to be a bag of mixed results for other firms. Asset management deal-making hit a record in 2018, with 253 transactions announced and disclosed deal value rising 29% to $27.1 billion from 2017, according to research compiled by Sandler O’Neill & Partners LLP.

Two recent deals weren’t able to stem outflows, showing the risks of merging to survive.

Note: 2018 was the first full year of post-merger operations for both companies.

Sources: Bloomberg reporting and company data

Janus Henderson’s clients have yanked $38.5 billion in total since its 2017 tie-up, with the firm suffering its worst outflows in the second quarter this year. The combination of Aberdeen Asset Management and Standard Life, intended to create a heavyweight capable of competing with low-fee passive money managers, also failed to persuade investors to keep their money invested there.

“Last year was one of the most difficult investment environments since 1901,” Keith Skeoch, CEO of Standard Life Aberdeen said at the company’s annual general meeting in May. “That’s quite stressful and there’s a lot of uncertainty our people are coping with.”

“We knew it was going to be tough and would take years,” Skeoch said in a telephone interview in June about the tie up.

Those stumbles haven’t cast a chill on mergers in the industry.

In Europe, Deutsche Bank’s DWS Group has been exploring tie-ups with other asset managers to gain scale and had favored a potential deal with UBS Group AG’s asset management unit. Those talks broke down earlier in May. DWS has also had preliminary discussions with Amundi and Axa SA, according to people with knowledge of the matter. Swiss money manager GAM Holding meanwhile is reviving attempts to sell itself, a process that stalled as the firm struggled to contain the fallout from a scandal involving a former bond trader. In the U.S., Invesco took a $5.7 billion bet on the future of active management with its acquisition of OppenheimerFunds Inc. from Massachusetts Mutual Life Insurance Co. OppenheimerFunds is known for its active management business.

“In the end, it’s been a rough few years for the active managers and will likely continue in that way for the traditional asset managers who have not shifted strategy to take advantage of the more in-vogue asset classes,” said Sumeet Mody, director of equity research at Sandler O’Neill. “The managers who have been underperforming will likely have to close up shop or look for a good acquirer to take them over.”

Casey Quirk’s Phillips said the most likely targets fall into two batches. Those with specialties in areas like private markets, infrastructure and active fixed income will look increasingly attractive to acquirers, because those skill sets are in higher demand. Other potential targets will simply offer the opportunity to build scale while saving costs, he said.

Note: Displays U.S. and European asset managers with between $10 billion and $500 billion assets under management in 2018, according to their latest filings, with non-U.S. dollar figures converted as of the last day of the year. The vertical dividing line represents the median operating margin, also based on the latest filings, of all qualifying managers. GAM Holding was excluded because its operating margin was a significant outlier. All net flow figures are for the 2018 calendar year except for Eaton Vance (fiscal year through Oct. 31), with non-U.S. dollar figures converted using the average exchange rate for the period.

Sources: Bloomberg reporting and company data

As the business of managing money is being upended, the heyday of Lynch, Miller and Gross is receding further into the past. In their scramble for survival and under consistent fee pressure, firms are being forced to adapt. Many will be absorbed by other bigger competitors, some will disappear altogether and almost all will need to either cut costs or hone their strategies to increase profit in these uncertain times.

“Asset managers know they need to change,” said Christian Burgin, who previously worked at Standard Life Investments before co-founding Visible Capital, a technology start-up servicing advisers, wealth managers, platforms and funds. “They’re trying, but are finding it difficult.”

Design & development assistance: Cedric Sam

Additional reporting: John Gittelsohn, Lucca de Paoli, Alex McIntyre, Mathieu Benhamou, Benjamin Robertson and Alexandra Stratton

Editors: Shelley Robinson, Alan Mirabella, Sree Vidya Bhaktavatsalam and Andre Tartar

Note: The data source for the top graphic is the Investment Company Institute. For the purpose of this analysis, Janus Henderson is included in Europe because it is headquartered in London, though it is listed in the U.S.

Comments from asset managers included in “Scoping out M&A Possibilities”

Azimut Holding Spa: “We have two main objectives: To increase our distribution capability and attract fund manager capabilities we don’t have,” said Gabriele Blei, the company’s CEO. “We don’t look to acquire 100% of a company but rather to form a partnership where the local people are fully in charge. The way we execute our growth has been focused on partnerships around the world.”

Gamco Investors Inc.: Founder Mario Gabelli said that the business is doing well independently. But he also understands his company’s value to any potential acquirer. “The obvious entity would be someone who wants to have a presence in the United States because they have competencies around the globe,” he said.

Janus Henderson: “Our main focus at Janus Henderson, which drives the value we are creating for clients, shareholders and employees, is to provide more investment solutions, increase our financial strength and further diversify our active management offering,” said a company spokesperson. “Our financial strength enables us to continue to invest in sustainable, organic growth to meet the evolving needs of our clients and uphold our commitment to return strong cash flow to shareholders.”

Schroders Plc: “In line with our stated strategy, we have continued to focus on further diversifying our product offering by expanding our capabilities in private assets and alternatives,” said Peter Harrison, the company’s CEO. “In 2018, we broadened our expertise in real estate with the acquisition of Algonquin Management Partners S.A., a hotel management company. We also made an investment in A10, a loan origination business based in the US. 2018 also saw the first full year contribution from Schroder Adveq, the private equity business we acquired in 2017. This has grown to 7.4 billion pounds of assets under management, benefiting from the combination of investment expertise and Schroders’ wider distribution footprint. We have supported this growth with investment in specialist infrastructure support and a dedicated private assets and alternatives distribution team. We continue to look for opportunities to further develop our offering in this area.”

Vontobel Holding AG: Vontobel’s shareholders include the Vontobel family and the Vontobel Foundation, who hold more than 50% of the shares, each of whom has signed a long-term shareholders’ agreement. Peter Dietlmaier, a spokesman, said: “The idea that Vontobel could be a takeover target is utter nonsense.”

Waddell & Reed Financial Inc.: “Over the last two years we have taken deliberate and necessary steps to strengthen the foundation of our company,” said Roger Hoadley, a spokesman for the company. “Looking ahead, we are fully committed to our asset management and wealth management businesses. As we enter the next phase of our transformation, we are actively pursuing potential acquisitions to accelerate our growth strategy across both lines of business.”

The following companies declined to comment: Brooks Macdonald Group Plc, Diamond Hill Capital Management Inc., Eaton Vance Corp., Federated Investors Inc., Man Group Plc, Manning & Napier Inc., Pzena Investment Management Inc., Rathbone Brothers Plc, and WisdomTree Investments Inc..

The following companies didn’t respond to requests for comment: Artisan Partners Asset Management Inc. and Cohen & Steers Inc.

U.S. Active vs. Passive Fund Net Flows

Asset Managers With $74 Trillion on Brink of Historic Shakeout

Survival of the Fittest

Switching Over

Worth Their Fees?

Scale Game

State of the Industry

Fee Pressure

Approaching Zero

A Tale of Two Funds

Fallout

Churn at the Top

Merger Meltdowns

Smaller Together

Scoping Out M&A Possibilities