Largest managers grow assets by 14.5%

Despite the market downturn induced by the coronavirus pandemic, the 500 largest global money managers in 2020 grew their combined assets under management 14.5% to $119.5 trillion, while boosting revenue.

Money manager AUM growth globally has continued to be driven by investor appetite in areas such as environmental, social and governance investing; ETFs; and higher-risk strategies such as private markets and emerging markets debt or equity, sources said.

The annual ranking of the largest global money managers by Pensions & Investments and Willis Towers Watson PLC's Thinking Ahead Institute also showed that active assets under management increased 15.4% to $23.71 trillion, while passively managed assets increased at a slightly faster rate (16.2%) to $8.34 trillion at the end of 2020. Assets allocated to ESG mandates, meanwhile, rose by 43.8% in 2020 to $1.33 trillion.

The data is based on 208 firms that participated in the survey and provided data every year since 2016.

"The year overall turned out to be much better than expected given the monetary and governmental support that resulted in markets being very strong in the second half of 2020, which certainly was a big boost to asset managers," said Rory Callagy, managing director at Moody's Investors Service Inc. in New York, who leads the firm's asset management team.

In June, Moody's changed its outlook for the money management industry to stable from negative as stronger markets and improved investment performance led money managers to higher performance-fee revenue in the fourth quarter of 2020.

Mr. Callagy said managers saw improvements in valuations across asset classes globally in the second half of 2020, including equity, fixed income and private markets.

The MSCI All Country World index was up 24.3% in the second half of 2020, compared with a loss of 6% in the first half of the year. The MSCI Europe index gained 11.1% in the second half of the year, after recording a 12.5% loss in the first six months.

Meanwhile, the MSCI All Country Asia Pacific Net Total Return U.S. Dollar index returned 28.3% in the second half, and -6.2% in the first half. Corporate bond index Bloomberg Global Aggregate Total Return index delivered a 3% return in the first half of the year and 6% in the second half of the year.

The Thinking Ahead Institute also found that the number of strategies on offer during the year increased across 70% of the surveyed firms, and sources said that managers operating in areas attracting higher investor demand, such as ESG or private markets, generated better organic AUM growth.

Active managers that have traditionally operated in public markets are trying to organically or through acquisitions expand their presence into private markets and ETFs, Moody's Mr. Callagy said.

For example, in October 2020, PineBridge Investments said it agreed to acquire U.K.-based private equity real estate manager Benson Elliot Capital Management. At the time of the announced deal, PineBridge had a total $104.4 billion in assets under management, and ran $6 billion in alternative assets under management as of June 30, according to its website. The transaction added more than $3.5 billion in AUM. In another deal, CI Financial Corp. completed the acquisition of exchange-traded fund business WisdomTree Asset Management Canada Inc. in February 2020. The transaction added 14 Toronto Stock Exchange-listed ETFs with assets totaling C$958 million ($733 million), a spokesman said at the time.

Buying a firm gives scale faster than trying to break in on the ground floor, Mr. Callagy said. "It's harder to grow the ETF segment because you have large players with large scales," Mr. Callagy said.

"We are seeing more competition on the ETF side with firms entering the market, firms that are converting existing mutual funds into an ETF wrapper or active ETFs where they can take (an) existing capability and offer it in a wrapper. That seems to be resonating with investors," he said.

While money managers have been grappling with increasing regulatory and technology costs of running their businesses, they are finding ways to offset these costs, other sources said.

The element that "is protecting fees is the pivot from asset managers to incorporate ESG as a core element of how it is you invest … driven for some by regulation," said Jonathan Doolan, managing partner at consultant Indefi in Paris. Markets are acknowledging that ESG can lift active management in a lot of ways, he added.

Going forward, Mr. Doolan thinks that investors and intermediaries will opt for specific sustainability propositions, such as focusing on clean water, so these buyers can meet their ESG policies.

Specific ESG strategies are "going to sell more effectively going forward and that's what's going to be required for products with higher fees," he said.

In response to the effects of the pandemic and Europe's Sustainable Finance Disclosure Regulation, managers increased their focus on the ESG objectives of their clients in 2020. The Thinking Ahead Institute found that client interest in sustainable investing, including voting, increased across 91% of the firms surveyed.

"The investment industry had to raise its game significantly to take account of sustainability," said Roger Urwin, global head of investment content at the Thinking Ahead Institute in London, noting that COVID-19 put an accentuated focus on sustainability issues.

"Because of the pandemic we became more aware of the interconnectedness of the financial system with the social and environmental systems," he added.

Mr. Doolan added that subadvisory is one of the fastest-growing businesses in Europe when it comes to specialist strategies such as ESG as well as more niche asset classes such as Asian high yield.

"You are seeing on the emerging markets equity side and debt side significant appetite and significant use of subadvisory," he noted, adding that managers can still profit while outsourcing these strategies to specialist providers.

Consolidation in the money management sector is accelerating and driven by additional factors, sources said.

WTW's research found that over the 10-year period ended Dec. 31, 2020, 221 money managers disappeared from the list of the top 500 firms in the world due to competition and consolidation.

Sources said that the increase in consolidation is driven by factors beyond increasing regulatory and technology costs as managers are buying each other to get scale, incorporate new or specific strategies and to be able to compete on fees with more distribution.

For example, Franklin Resources Inc. acquired Legg Mason Inc. in a $4.5 billion deal in 2020, while Morgan Stanley agreed to acquire Eaton Vance Corp. in October 2020.

In a news release, Greg Johnson, executive chairman of the board of Franklin Resources, said: "This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies."

Mr. Callagy said that heightened interest in private credit also is driving some of the merger and acquisition transactions, with managers buying insurance companies outright to get access to and manage their investment portfolios.

Indefi's Mr. Doolan said that "the winners are winning more." That's because having the "right offering in the right category and having a thoughtful approach to products will be in demand next year and in years to come," he said. "The largest firms have been able to see that in terms of making their investment and being able to far better engage with clients and to develop a multiproduct relationship. For multiproducts, the tenure with clients goes up to nine years from six years with a single product," he said.

Speaking about the potential targets for future expansions, Mr. Doolan said that it will be hard for firms with AUM at between $200 billion and $300 billion to grow and get to that multiproduct relationship so they're more likely to be receptive to a buyer or look for an acquisition.

The Thinking Ahead Institute's data showed that assets run by the top 20 managers represented 44% of total AUM, up from 43% last year. These firms run between $1.39 trillion and $8.68 trillion and saw their assets grow 17.2% overall to $52.6 trillion in 2020.

The 10-year compound annual growth rate of the top 20 firms was 7.2%, outpacing that of the 500 largest managers' 6.3%. Over a five-year period, the compound annual growth rate for the top 20 was 10.6% and 9.2% for the top 500 managers in U.S. dollars.

Still, in 2020, there were changes to the manager lineup in the top 20 as managers positioned themselves for future growth by adding new capabilities. While BlackRock Inc. and Vanguard Group Inc. retained the top two spots with $8.68 trillion in assets and $7.15 trillion, respectively, Fidelity Investments swapped positions for third place with State Street Global Advisors, its assets increasing 19% to $3.61 trillion from $3.04 trillion a year earlier.

A Fidelity spokeswoman said that the increase in assets was a result of Fidelity delivering strong, consistent investment performance. Overall investment performance continued to be strong across all asset classes in 2020, she said, as 77% of Fidelity's assets beat their relevant benchmarks over the three-year period ended Dec. 31, 2020, up from 71% over the three-year period ended on Dec. 31, 2019. In 2020, Fidelity also introduced eight new thematic mutual funds and launched its first active equity ETF, she added.

Newcomers to the top 20 list included Franklin Templeton in the 14th spot with $1.5 trillion in assets. Moody's Mr. Callagy noted that the Legg Mason acquisition boosted Franklin's offerings with more alternative strategies, retail strategies and separately managed accounts as well as a fixed-income business of Legg Mason's Western Asset Management. The combined firm now operates as Franklin Templeton.

Managers with the largest jumps in ranking over the past five years included Morgan Stanley and T. Rowe Price Group Inc., which climbed 14 and 11 spots, respectively, over the five years to rank No. 15 and 16 in 2020. Morgan Stanley's AUM increased to $1.47 trillion, up 30% from $1.13 trillion in 2019, while T. Rowe's AUM rose 21.5% to $1.47 trillion from $1.21 trillion a year earlier.

Outside the top 20, Geode Capital Management and Manulife Investment Management also recorded big jumps over the five-year period through 2020, moving up WTW's ranking to 37th from the 77th and to 31st from the 57th, respectively.

Mr. Callagy added that Morgan Stanley's acquisition of Eaton Vance Corp. announced in October 2020, which did not close until 2021, helped the firm add an ability to customize strategies through Eaton Vance's customized solutions firm Parametric Portfolio Associates LLC. The merger added $507.4 billion in assets under management for Morgan Stanley.

"Managers are trying to add direct indexing capabilities. Parametric has that capability. That is allowing you … to use factors to create your own indexes and allows more customization," he said.

"Investors are looking for what is more catered to their specific needs. If you can do that at scale to offer that to financial intermediaries and retail investors, you'd be at a competitive advantage. Some of the leading firms are moving already in the right direction," Mr. Callagy added.