Push for customized, factor-based strategies feeding wave of growth

Client demand for more customized and factor-based solutions is driving growth within the subadvisory industry.

Subadvised assets of the 25 largest subadvisers grew 7.7% to a total of $3.16 trillion as of Dec. 31, data from Pensions & Investments' annual survey of money managers show.

Part of the increase is attributable to Boston Partners, with $50.6 billion in subadvised assets, which didn't fill out the survey the previous year.

As is the case with the broader money management industry, the subadvisory business is seeing the big getting bigger. The top 25 subadvisers accounted for nearly 72% of the total $4.395 trillion in subadvised AUM as of Dec. 31.

A year earlier, the top 25 represented 70.1% of the total subadvised AUM. And at year-end 2011, the top 25 represented 69.6% of the total.

“We saw significant flows into beta products last year,” said David Lomas, managing director and head of the global financial institutions group at BlackRock Inc., New York. BlackRock was the third-largest subadviser with $233 billion in subadvised assets under management as of Dec. 31, up 21.4% from year-end 2015.

Mr. Lomas added: “The rise of factor-based investing is going to continue. It's a small part of the asset allocation universe today, but understanding different factors that drive alpha will become more prevalent.”

While the movement to passive management from active was one of the biggest trends Mr. Lomas saw in the subadvisory business, he noted “there's still a place for active management in the subadvisory world,” particularly in inefficient markets, such as Asian equities.

“We'll still see searches in the (actively managed subadviser) space, but I am seeing more flows away from single-strategy solutions toward multiasset-style proposals,” Mr. Lomas said.

Barry F.X. Smith, a senior managing director and head of the Americas institutional client group at State Street Global Advisors, Boston, said in a separate telephone interview that he has also noticed an increasing interest in customized solutions and factor-based approaches from subadvisory clients.

Mr. Smith also said increasing regulatory complexity and a slowdown in variable annuity sales were the two biggest challenges the manager faced in the subadvisory business in 2016.

SSGA ranked eighth among the top subadvisers, with $152.3 billion in subadvised assets as of Dec. 31, down 5.7% from a year earlier.

“This is a strategically important space to us that we're committing resources to,” Mr. Smith said.

SSGA has also been engaged in more conversations with clients about the implementation of responsible investing and environmental, social and governance factors, although these conversations are in “the very early stages.”

“We've seen an uptick in clients looking to collaborate not just in customized solutions but also portfolio construction as well,” Mr. Smith added.

The subadvisory industry is mirroring the broader growth trend occurring in the industry.

One large subadviser said his firm has noticed more subadvisory clients are giving larger mandates to larger, more established managers. “This allows the advisers to drive down costs, because larger mandates give you more leverage to negotiate lower fees,” explained Kirk Hartman, global chief investment officer of Wells Capital Management Inc., San Francisco.

Despite experiencing an 8% drop in subadvised assets year-over-year, Wells Capital ranked fourth among the top subadvisers, with $214.2 billion in AUM.

In the year-earlier survey Wells Capital ranked second.

Mr. Hartman attributed the decline to “competition from passive.”

Among the top 25, while placement has shifted, the names generally have remained the same.

Wellington Management Co. LLP, Boston, once again topped P&I's list of subadvisers this year, with $526.8 billion in subadvised assets as of Dec. 31, up 5.6% from a year earlier.

Geode Capital Management, Boston, moved up to second place with $258.3 billion after making a 30.4% year-over-year gain in subadvised assets.

Pacific Investment Management Co. LLC, Newport Beach, Calif., ranked fifth with $199.3 billion in subadvised assets as of Dec. 31, up 3% from year-end 2015.