A recent article in The Wall Street Journal comments on the findings of an annual study of the investment management industry conducted by The Boston Consulting Group. The study provides interesting statistics of this industry:
- Global assets under management (AuM) rose to $62.4 trillion in 2012, surpassing the 2007 record of $57.2 trillion.
- Operating margins rose to 37 percent of net revenues and profit increased to $80 billion, although it remained roughly 15 percent below precrisis highs [of ~$94B].
- The increase in new asset flows remained relatively modest, totaling just 1.2 percent of global AuM in 2012. Most of those new flows moved to solutions, specialties, and passive asset classes rather than to the actively managed core assets of traditional players.
- A full quarter of traditional managers actually experienced significant erosion of their traditional actively managed core-asset base in 2012.
The study goes on to say that
The most successful managers are either specialists or traditional providers who have become “ambidextrous.” That is, they have maintained their active core-asset businesses while developing capabilities to capture new faster-growth assets, including solutions and specialties. While traditional players saw their profits decrease by 2 percent a year since 2010, specialists and ambidextrous players saw their profits increase by 10 percent a year.
So, what are those “solutions” and “specialties”? The article explains:
Specialty products include small-cap, mid-cap and sector stock investments as well as fixed-income products, such as high-yield bond and convertible investments among others. Solutions-based products are those that customize a solution for a client, such as target-date, absolute-return, volatility and flexible investments.
While the custom nature of solutions makes sense (after all, this is exactly what an investor would expect as a value added by a professional asset manager), the definition of specialties is surprising — it essentially implies that only large-cap equity and regular bond investments are “not special.” Given the current variety and accessibility of exchange-traded products (ETPs) that cover all of the above asset classes, it is hard to consider these “specialty products” really special. This approach will certainly not be able to sustain the high level of operating margins, which would not be attainable in most other industries.
Alpholio™ clearly demonstrates that most of active asset management strategies do not add value on a truly risk-adjusted basis, i.e. are deficient when compared to a dynamic portfolio of ETPs. The “burning platform” analogy the study uses in regard to 25% of active managers certainly applies to a much larger percentage of firms.