While global assets in exchange traded funds continue to surge, assets within the world’s 500 largest asset managers have fallen for the first time in half a decade – assets fell by $1.4tn to $76.7tn in 2015, the first decline since 2011, according to research by Willis Towers Watson.
According to BlackRock, global ETF assets have grown from $2.8tn to $3.4tn over the year ended 30 September 2016.
Josh Brown, financial adviser and blogger, known as the Reformed Broker, wrote: “It’s amazing that this [decline in active assets] is happening against the backdrop of the largest stock market on earth (the US) trading within points of all-time highs, not to mention the global bond market at historically low yields.”
Assets in the largest European firms took a big hit, as they fell by 3.3% in 2015 to $25.1tn, while assets held by the largest US asset managers fell by 1.1% to $44tn over the same period.
Luba Nikulina, global head of manager research at Willis Towers Watson, told the Financial Times: “The decline in global assets demonstrates the impact of the challenging investment landscape and currency fluctuations on asset managers across the globe.”
Sovereign wealth funds have notably contributed to the decline in assets at these firms – pulling $46.5bn from funds last year – as they seek to prop up their oil-dependent economies while oil prices are still low.
Numis analyst David McCann said the decline in active fund assets continues to place pressure on asset managers’ profit margins. He predicted that there would consequently be industry consolidation and acquisitions to offset outlooks for weak earnings.
Consolidation is already happening in terms of assets owned by the largest 500 asset managers in the US. They held 41.9% of assets in 2005 – and now own 52.5%, at the end of 2015.
The fall in assets at these firms compares starkly to the growth in global ETF assets, from $2.8tn in September 2015 to $3.4tn as of 30 September 2016, according to BlackRock’s most recent ETP Landscape report.
Renowned active investor Bill Miller, who co-runs the Legg Mason Opportunity Trust fund, agrees that investors will continue to shift capital from “expensive passive management” – otherwise known as closet index funds, which charge relatively high fees to simply invest in the same stocks as an index – to “inexpensive passive” funds like ETFs and index funds.
Miller estimates that 70% of existing active funds are acting as closet index funds, with a very small percentage of active share i.e. the amount of investment that deviates from the benchmark.
The shift of capital is only halfway complete, he said, and will continue to the point where passive management could ultimately take up 70% of the world’s assets under management. From a performance perspective, given that passive beats active net of fees most of the time, this move makes complete sense.
The largest asset managers in the world are BlackRock, Vanguard and State Street Global Advisors, with $4.6tn, $3.3tn and $2.2tn respectively. They are also the three largest ETF providers in the world.