Managers cautiously optimistic about 2022

Despite uncertainty about the possible effects of higher inflation and equity valuations after a strong year of asset growth and profitability, many money managers are optimistic about their prospects in 2022.

Other big themes for money managers in the new year — aside from deciding where their employees will be working during the ongoing COVID-19 pandemic and beyond — include inflows into alternative strategies; continued fee pressure on traditional managers; employee retention and recruitment in a competitive market, especially for people with diverse backgrounds; technology advancements; and expansion of ESG investment strategies.

Equity market returns were strong in the year ended Dec. 31 and contributed to manager growth with the S&P 500 index up 28.7% and the MSCI ACWI index up 19%, compared, respectively, to 18.4% and 16.9% as of the same date a year earlier.

In contrast, the Bloomberg U.S. Aggregate Bond index was down 1.5% in the year ended Dec. 31 in contrast to 7.5% in the prior year.

"The economic state of the money management industry in 2021 was as strong as I've ever seen it in terms of profitability. In aggregate, it was a fantastic environment for money management firms. Many managers, especially alternative firms, are going into 2022 on a very strong footing," said Kevin Quirk, a Stamford, Conn.-based principal at Casey Quirk, a practice of Deloitte Consulting LLP.

To varying degrees, industry observers and money managers said they expect 2022 to be another good year.

"Our central case is that 2022 will be an average, positive year. Nothing in the market is too worrying. Equities likely will go up to provide some genuine growth and inflation probably will go down," said Christopher Redmond, global head of manager research at Willis Towers Watson PLC, London.

Good equity returns and lower inflation will reinforce markets, as supply chain problems ease and gas and electricity prices fall, he said. "The environment should be largely positive for money managers."

State Street Global Advisors is mostly in agreement, said Lori Heinel, Boston-based executive vice president and global CIO.

"Global markets' recovery will continue and gain momentum. We think the COVID omicron variant probably won't disrupt the path to recovery," Ms. Heinel said, also acknowledging that "inflation likely will be a challenge in 2022."

SSGA currently is repositioning its equity portfolios to overweight European equities, given the more accommodative fiscal and monetary policies of countries in the region. Previously, SSGA overweighted U.S. equities, Ms. Heinel said.

SSGA managed $3.86 trillion as of Sept. 30.

Other money managers were more cautious about 2022 market activity.

"We had such strong tailwinds from government stimulus in 2021. In 2022, clearly this may change as the Fed's balance sheet will be shrinking" and central banks around the world will systematically raise rates, said George Walker, chairman and CEO of Neuberger Berman Group LLC, New York.

"This will create choppy markets," he added.

Neuberger Berman managed $437 billion as of Sept. 30.

Among the strategies money managers and industry pundits said likely will do well in smooth or choppy markets this year are multiasset portfolios that mitigate the potential risk of high equity allocations falling, and diversified, defensive strategies such as Treasury inflation-protected securities, real estate, infrastructure and commodities to compensate for higher inflation.

Alternative investment managers running defensive strategies are poised for an outstanding year, sources said.

The impetus for high investor demand for private equity, real estate, venture capital, private debt and infrastructure is simple, said Neuberger's Mr. Walker. "There is no reasonable combination of public market equity and fixed income that will enable plan sponsors to meet their return targets so they have to turn to alternatives, even though many already are overallocated."

Neuberger Berman managed $89 billion in alternative assets as of Sept. 30.

Exchange-traded funds also will continue to see net inflows from retail and institutional investors, observers said.

Data from Chicago-based Morningstar Inc. showed that U.S. ETF assets totaled $7.25 trillion as of Dec. 31, up 31.8% from year-end 2020 and up 63.2% from Dec. 31, 2019.

Estimated net inflows into U.S. ETFs showed a continued rise in the year ended Dec. 31, totaling $906.3 billion. That's compared to $505 billion in 2020 and $333.7 billion in the 12 months ended Dec. 31, 2019, according to Morningstar Direct, the research firm's investment analytics platform.

Ms. Heinel said SSGA is expanding its ETF strategies in Asia with new strategies, including fixed income, in response to demand.

She said SSGA also is developing ESG investment strategies with a focus on climate and climate transition due to demand from investors because "increasingly, all of our clients are exploring what ESG is as they try to achieve carbon reductions in their portfolios."

Goldman Sachs Asset Management, New York, is "very focused on ESG and sustainable investment strategies," said Heather Miner, managing director and chief operating officer.

GSAM will boost its ESG capability and assets under management by $355 billion and assets under advisement of $70 billion through the acquisition of NN Investment Partners, a Dutch ESG specialist located in The Hague, in the first quarter this year.

Goldman Sachs Asset Management had $2.37 trillion under management as of Sept. 30.

Merger and acquisition activity likely will remain active in 2022 as it was in 2021, again with quite a lot of the deal flow involving smaller firms seeking to join large companies. On the other hand, big firms likely will be shopping for specialist managers to increase their investment capabilities as well as for firms with good distribution networks to broaden their client segments, said investment banker Brian Lauzon, managing director at InCap Group Inc., Philadelphia.

"Firms without a succession plan, a small stable of strategies and not-so-great distribution may become acquisition targets," he said.

Increasingly, alternative asset management firms are in the sights of larger traditional managers that want to increase their capabilities in these areas, Mr. Lauzon said.

One example is the recently closed acquisition of private credit manager Oak Hill Advisors LP, New York, which manages $53 billion, by Baltimore-based T. Rowe Price Associates Inc., which manages $1.63 trillion.

Money managers of all sizes are nervous about what industry pundits say is the industry's hottest-ever talent war.

"Money managers are very optimistic about 2022, but also are very concerned about retention and recruitment because the hiring environment is so competitive right now," said Alan Johnson, managing partner at Johnson Associates Inc., New York, a compensation advisory firm.

"2021 was a remarkably good year and bonuses will be higher. There may be a wave of departures after 2021 bonuses are awarded in January and February," he added.

The firm estimates that 2021 bonuses will average 15% higher than in the prior year and Mr. Johnson said managers have revised their pay scales upward to win over candidates.

He also highlighted the scarcity of diverse candidates, noting that "there aren't many diverse candidates and few are available," despite many managers placing a bigger emphasis on diversifying their employee ranks.

One manager that had a successful recruitment year in 2021 was Capital Group Cos., Los Angeles.

Recruitment overall was strong, including for diverse candidates, said Ralph E. Haberli, head of institutional retirement.

"Capital has a lot of long-tenured employees so we made it a point to bring in new people to add both thought diversity and people from underrepresented minorities and gender," Mr. Haberli said.

Capital Group managed $2.6 trillion as of Sept. 30.

Turnover at SSGA in the U.S. was very low in 2021 and "we are not seeing the Great Resignation yet," Ms. Heinel said, adding that SSGA hired more diverse candidates than non-diverse employees last year.

Goldman Sachs is "very focused on bringing in diverse talent. It's what our (limited partners) and investors want," Ms. Miner said, adding that more than 50% of the portfolio managers running Goldman Sachs' fundamental equity strategy are women.

Like many money managers, Goldman Sachs is actively seeking to recruit hundreds of "best-in-class engineers to help us better engage with investors and build out the technology needed for blockchain and tokenization," Ms. Miner said.

The Vanguard Group Inc., Malvern, Pa., describes itself as a technology-first company and this year is investing in technology that will help defined contribution plan sponsors and participants be more engaged with their investments through access to both digital and human advice, said John James, managing director and head of the firm's institutional investor group.

"We've been talking about this with plan sponsors and it's their biggest demand. The program will be our biggest focus," Mr. James said, adding that the advice program likely will attract more defined contribution plan employers, and as a result, participants to company 401(k) plans.

Vanguard managed $8.2 trillion as of Nov. 30.

Money managers are optimistic about their businesses in 2022, albeit wary of potential ravages from inflation and lower equity allocations.