Midsize money management firms see growth shrinking

For the first time in a decade, midsize managers are beginning to feel the squeeze, the Pensions & Investments/Towers Watson World 500 ranking of money managers shows.

“The trend we have observed ... (is in) the proportion of assets held by the larger managers, middle-sized managers, and small firms,” said Luba Nikulina, London-based global head of manager research at Towers Watson & Co.

Assets managed by the world's 500 largest money managers increased 2.1% to $78.1 trillion in the year ended Dec. 31.

The data show the 20 largest money managers in the ranking saw the proportion of assets they manage grow, to account for 41.6% of the total, up from 41% a year previous. Those in spots 21 to 50 also took a bigger share, up to 22.9% at Dec. 31, from 22.2% in 2013.

At the other end of the scale, the managers occupying places 251 to 500 accounted for 6% of the total assets under management. That compared with 5.7% a year previous.

However, the money managers taking up spots 51 to 250 held a 29.5% share of the total assets under management, compared with 31.1% a year previous. That marks the first time these midsize managers accounted for a less-than 30% share of the total assets under management in the past 10 years.

“We can see the reasons why this is happening: At the larger end, we have trends such as the growth of passive (management) — we have been observing it for a few years and it still continues,” Ms. Nikulina said. She said that most of the capital allocated to passive strategies will be awarded to a larger firm with the infrastructure necessary to manage passive strategies on a large scale.

A second trend supporting the larger end of the universe relates to the growth of regulatory requirements that are affecting the money management industry, such as increased transparency and reporting requirements.

“You need to have the large infrastructure to be able to comply with additional and new requirements,” she said.

Passive is not the reason for growth at the smaller end of the scale. “We think what is happening there is, alongside this move toward passive, which is very, very significant, we also have more and more asset owners and consultants looking for more skill in the current market environment,” Ms. Nikulina said, as they tend to focus on one niche area of investment.

Market beta might have looked “relatively attractive” in the past few years, she said, but volatility had not been particularly high, leaving alpha strategies with relatively poor performance.

“Now the outlook has changed quite a bit — think about possible scenarios, (and) the downside risks outweigh possible upsides. Alpha and skilled beta could be really beneficial. That is likely to (support) the growth at the smaller end — independent, small managers able to attract more capital,” she said.

The 2.1% total growth of assets last year was the smallest since 2002, with the single exception of 2008. In the year ended Dec. 31, 2013, the top 500 money managers recorded growth of 11.9%.

“You can also see there was very little in terms of net inflows into the firms covered by our survey. We have seen a number of years of growth in the asset management industry, and now it feels like it has slowed down ... almost stopped,” Ms. Nikulina said.

The 20 largest money managers, however, grew at a faster pace than the overall AUM. Assets increased 3.7% for the largest 20 money managers, but even that was a marked difference compared with the top 20 growth in 2013, at 10.8%.

The U.S. retained its crown as taking the lion's share among the top 20, accounting for 65.5% of that group's assets under management. However, this proportion was smaller than the 66.6% of top 20 assets that U.S. firms represented in 2013. (Among all 500, U.S. firms gained share, accounting for 52.1%, up from 50.7%.)

European money managers stepped into the gap, increasing their assets under management in the top 20 firms to 34.5% at Dec. 31, compared with 33.4% a year earlier.

BlackRock Inc. took the top spot again, with $4.65 trillion of assets under management — up 7.6% for the year. Vanguard Group Inc. retained second place, with a 14.4% increase to $3.15 trillion.

There was a change in third place: State Street Global Advisors grew 4.4% to $2.45 trillion of assets, displacing Allianz Group. Allianz slipped to fourth place as its assets decreased 8.5% to $2.19 trillion.

There were several changes in the top 20. Deutsche Bank AG moved up one spot to 10th in the ranking, despite a -0.6% change in assets under management, to a total $1.26 trillion. The Goldman Sachs Group saw growth of 13.1%, taking it to $1.18 trillion and 11th place, up from 15th in 2013's rankings.

Entering the top 20 was Legal & General Group PLC, climbing to 15th from 23rd a year previous. Assets under management increased 45.2% to $1.08 trillion.

The popularity of passive management continues to grow. Passive assets managed by the 500 managers far outpaced their total AUM growth, rising 11.7% in 2014. However, this was a slower growth rate than in 2013, when passive grew 16.4%.

The compound annual growth rate of passive since 2004 was 12.8%; vs. a 4.8% compound annual growth rate for total AUM of the 500.

Of the assets that were identified as either passively or actively managed at Dec. 31, 78% were categorized as active. At Dec. 31, 2013, active accounted for 80% of the pool.

“(Passive) has grown to a degree that we now have become a little cautious about it - we are seeing significant flows in passive strategies,” Ms. Nikulina said. “We are thinking about doing more in the alpha space. And in the alpha space there are some quite significant issues,” related in part to cost and exposure.