More firms feeling the draw of retail market opportunities

Updated with correction

Institutionally oriented money managers are dipping their toes in the retail investment market in response to declining defined benefit plan assets as corporations wind down their plans and baby boomers take their defined contribution plan assets with them when they retire.

Alternative investment managers are leading the way when it comes to new investment funds specifically for retail investors, sources said, but traditional managers, even those that have catered to retail investors for years, are trying new ways to attract investors to diversify their client base.

"Institutional managers moving into retail investment is a strategic planning topic that's brought up in every conversation we're having with managers. It's a really big story because defined benefit plans are essentially becoming long-term wasting trusts with no growth," said Michael S. Falk, a partner at Focus Consulting Group Inc., Long Grove, Ill.

Among managers actively pursuing retail investors ranging from individual Main Street investors to ultra-high-net-worth individuals are Ariel Investments LLC, Barings LLC, BlackRock Inc., The Goldman Sachs Group Inc., Hamilton Lane Advisors Inc. and The Vanguard Group Inc.

The retail investment market is enticing for institutional money managers given its size — $23.8 trillion, or 46.2%, of the total $51.5 trillion of professionally managed assets in the U.S. in 2019, according to a report from Cerulli Associates Inc.

While the size of the U.S. institutional investment market still tops that of retail channels, the latter is gaining market share, up 5.2 percentage points in the 10 years ended Dec. 31, the report said.

"Professionally managed assets are moving away from institutional to retail channels," said Brendan J. Powers, a Boston-based Cerulli associate director and co-head of the product development practice.

"As baby boomers retire and take their defined contribution assets with them, it's not helping managers deal with that drawdown as well as from defined benefit plans," he said. "The market share shift from institutional to retail investors will push money managers to try their hand at attracting retail investors, especially those impacted by declining defined benefit plan assets."

Recent moves by two of the industry's largest money managers, New York-based BlackRock and Goldman Sachs, which both have served institutional and retail investors for years, were at opposite ends of the retail investor spectrum.

Goldman Sachs, for example, recently launched a new investing app for its retail-oriented online platform Marcus by Goldman Sachs that allows individuals with as little as $1,000 to invest in model portfolios.

The app, Marcus Invest, is designed as a "digital-first advisory solution," which will recommend diversified ETF investment portfolios for individual investors that are monitored daily and periodically rebalanced, the firm said. They are based on proprietary strategic asset allocation views from Goldman Sachs' investment strategy group, said Andrea Finan, head of digital investing, in written comments.

"Our strategy is to serve the wealth needs of millions of consumers. We'll continue to learn and hear from our customers about their financial lives and will adapt our products and services over time to address these needs," Goldman Sachs said.

Goldman Sachs had $2.15 trillion in assets under supervision as of Dec. 31.

BlackRock, on the other hand, acquired Aperio Group LLC, Sausalito, Calif., a provider of customized, tax-optimized indexed separate accounts for ultra-high-net-worth individuals, for $1 billion in February. Aperio will continue to operate under its own brand name as a team within BlackRock's U.S. wealth advisory business, a news release from the company said.

Aperio's approximately $36 billion of assets under management increased BlackRock's separately managed accounts in its wealth management business by 30% to about $160 billion, said BlackRock in a news release.

Martin Small, senior managing director and head of BlackRock's U.S. wealth advisory business, said in the release: "The wealth manager's portfolio of the future will be powered by the twin engines of better after-tax performance and hyper-personalization."

Sources noted that BlackRock's acquisition of Aperio was a clear indication that the world's largest money manager is looking to increase its market share in the high-net-worth investment channel.

BlackRock managed $8.68 trillion as of Dec. 31.

Many institutionally oriented managers are targeting organic growth in the retail area rather than acquiring another money manager to add investment capability or retail distribution.

Barings LLC, Charlotte, N.C., for example, is a multiasset manager with 10% of its $345 billion AUM from wealth management investors via financial advisers. The company intends to increase its retail client base, said Daniel J. McGee, managing director and head of U.S. retail, in an interview.

"Barings is a traditional institutional manager and our overarching strategy is to create structures to bring institutionally managed strategies, including private markets, to retail investors," Mr. McGee said.

Barings launched its wealth management unit in 2013 with a mutual fund family, but the firm's next offering for wealth management clients will focus on creating fund structures for the firm's private credit and real estate strategies that now are managed for institutional investors.

In addition to a broad institutional client base, Ariel Investments LLC, Chicago, also has had a strong presence among retail investors for more than 30 years through its mutual fund family, but is looking for more ways to attract more individual investors, said Bonnie E. Orlowski, a New York-based senior vice president and head of consultant relations and financial intermediaries.

One problem facing money managers looking for more intermediary partners to handle the distribution to retail investors is the size and complexity of the industry.

"It's a very big market with a lot of entities and there's been a lot of merger and acquisition among (registered investment advisers). Dealing with intermediaries is like working with investment consultants" in terms of capturing the attention of the allocator, Ms. Orlowski said.

Ariel is adding more people to its intermediary team to better cover the market, she added.

Ariel manages $15 billion in active value equities.

Even as traditional managers like BlackRock, Barings and Ariel seek growth in retail assets under management, sources said alternative investment managers are far and away the most active in creating new funds for the retail markets.

"The question for years for alternative managers was `will they move into retail?' Now the question is 'when?'" said Justin White, principal at Stamford, Conn.-based Casey Quirk, a practice of Deloitte Consulting LLP, in an interview.

"In terms of institutional money managers getting into retail management, the biggest degree of change is from alternative managers," Mr. White said, adding that these firms are dependent to a great extent on defined benefit plan investors and are seeking to diversify their client bases.

"In 10 years, these managers will need retail investors to hit their growth targets," Mr. White said, noting Casey Quirk's five-year organic growth projections for alternative managers is 0.5% for global institutional assets ex-China and 2.2% for global retail assets ex-China.

Alternatives managers are partnering with traditional managers to offer their retail-oriented funds as well as offering them directly to accredited investors.

By way of example, Vanguard, Malvern., Pa., created a partnership in 2020 with private equity manager HarbourVest Partners LLC, Boston.

"We believe that private equity can provide investors with an opportunity to achieve broader diversification and earn excess returns over public markets," said Francis M. Kinniry, principal and head of private investments at Vanguard, in written comments.

The HarbourVest fund is only available to institutional investors using Vanguard's OCIO services, but "over time, we aim to expand access to qualified (retail) investors in additional channels," Mr. Kinniry said.

Vanguard announced on Feb. 16 that it closed the Vanguard HarbourVest 2020 Private Equity Fund at nearly double its target size. The 2021 vintage private equity fund now is open for investment.

Carolyn Wegemann, a Vanguard spokesman, declined to provide the size of the first fund in the series.