Some executives, however, warn that for now the prospect of a noticeable revival in investors' risk appetites looks more like wishful thinking than reality.
Seth Bernstein, the president and CEO of AllianceBernstein, said while it's not unreasonable to expect a pickup in flows to risk assets once the central bank begins easing, thus far "I haven't seen any great drive to re-risk," and certainly no renewed embrace of actively managed equities — where outflows have been a persistent headwind for the industry in recent years.
Bernstein suggested he wouldn't mind being proven wrong. But for now, he expects the redeployment of the trillions of dollars still sitting in cash back to risk assets to take "a couple of years." And even if other managers have bigger legacy equity businesses, Bernstein said "we're not immune to the performance challenges people have" in such a concentrated market dominated by the Magnificent Seven stocks, with growth outperforming value by quite a large margin.
Money driving to new vehicles
If and when money heads back to risk assets, meanwhile, it won’t necessarily flow back to the same investment vehicles it exited from two or three years before, executives say.
The amount of money heading back to risk assets now makes this an exciting time to be an active manager, with a twist: more and more investors are opting to use “different vehicles,” offering tax advantages, including active ETFs and customized separately managed accounts, said Eric Veiel, head of global investments and chief investment officer with T. Rowe Price Associates.
Continued outflows from actively managed equities mutual funds, while partly an asset allocation decision, also reflect the fact that mutual funds are becoming an “unloved vehicle,” leaving a lot of new assets now flowing into active ETFs and SMAs, said Ju-Hon Kwek, New York-based senior partner with McKinsey and Co., and leader of the strategic consulting firm’s North American asset management practice.
Over the past 18 months, McKinsey data showed ETFs, SMAs and collective investment trusts enjoying combined inflows of about $450 billion, in contrast to roughly $700 billion in outflows from active mutual funds, Kwek said.
For the latest quarter, most managers reported active equity outflows, partly offset by strong inflows for their ETF offerings and more incremental gains for the private markets businesses they've moved to build in pursuit of higher margins.
On the latest round of earnings call, executives of firms with relatively nascent active ETF businesses spoke at length about the progress being made in expanding their offerings and the investment vehicle’s importance going forward.
T. Rowe, for example, said its ETF business surged to $5.3 billion as of June 30 from $1.2 billion the year before, a big change on year but still only 0.3% of the Baltimore-based firm’s almost $1.6 trillion in client assets. Robert Sharps, T. Rowe’s CEO and president, on a July 26 earnings call, described that budding business segment as “a huge and compelling opportunity for us and one we’re really leaning into.”
In part, that’s because active ETFs allow firms with legacy mutual fund businesses to retain clients should they wish to consider other investment vehicles, on roughly comparable terms as a business.
Management fees for active ETFs may be somewhat lower than those for legacy mutual funds but their expense ratios are slightly lower as well so from a business perspective “it’s close to neutral for us,” said T. Rowe's Veiel.
Franklin Templeton's Johnson made a similar point, saying the history of ETFs as a passive vehicle may have left the impression that active ETFs are low margin vehicles as well, but “the pricing is actually very much in line with Franklin Templeton’s mutual funds," she said.
“And arguably over time, the costs to us will be less with the ETF and the SMA because you don’t have the transfer agency and the fund administration costs in the same way that you do with the mutual fund,” she added. Franklin reported more than $3 billion in net inflows to ETFs in the latest quarter, boosting the firm's ETF business to $27 billion.
One point of interest from the latest round of earnings reports is how unevenly a conducive backdrop benefited the bottom lines of listed money managers, reflecting the relative strengths of different business models in adapting to the industry's continued evolution, McKinsey’s Kwek said.
Building alternatives
Ben Phillips, a New York-based partner with strategic consulting firm Oliver Wyman, pointed to managers' broad-based push into private markets, in pursuit of higher fees, as a prime factor behind that disparity in results.
A lot of managers underestimate the difficulties of adding private market alternatives to their existing platforms, with all of the costs coming first and the rewards, in terms of growing revenues, only coming later, he said.
Oliver Wyman data from 2023 showed pure-play alternatives firms enjoying the highest margins, traditional firms focused on publicly traded stocks and bonds with lower margins and firms trying to build businesses in both traditional and private markets with the lowest margins, said Phillips, calling that challenge “the long, dark night” those firms have to endure before they can “get to that sunrise” of higher earnings.
Almost every manager, meanwhile, said they were focusing on offering private asset exposures to wealth management and retail clients, broadening a market segment that had previously been focused on institutional clients.
Phillips said traditional managers’ distribution muscle may allow them to go head-to-head with big pure-play alternatives managers in pursuing that huge wealth management and retail base.
Those big traditional managers “know how to get to the last mile of distribution and they know the advisers already sitting in those retail distribution,” building and maintaining those adviser relationships, with experience in getting those advisers to start thinking about something different, Phillips said.
T. Rowe’s Veiel said that long-term goal of offering private market exposures to wealth management and retail clients underlay his firm’s October 2021 acquisition of Oak Hill Advisors, a $61 billion private credit and alternatives boutique. “It was the main underlying industrial logic behind the transaction,” he said.
In its latest earnings call, a T. Rowe executive — in line with broader industry trends — said the firm was open to acquiring further private markets capabilities, “should the opportunity arise.”
