Markets drag down AUM for world's largest firms

The passive train hit the brakes in 2018, as assets under management fell more than 3% against a backdrop of battered equity markets.

The 20 largest and top 500 money managers in the world also saw assets fall last year overall.

The Pensions & Investments and Willis Towers Watson Thinking Ahead Institute annual ranking shows passively managed assets fell 3.4% in 2018 to $6.21 trillion, following 25.8% growth in 2017 and a 8.9% increase in 2016.

"That, clearly, bucks the longer-term trend," said Bob Collie, head of research at the Thinking Ahead Institute in London. "The most likely explanation will be to do with asset allocation," because passively managed assets are relatively concentrated in asset classes that performed the weakest in 2018. "But the decrease is notable since it is unexpected," Mr. Collie added.

At the other end of the investment scale, active assets under management fell 3% to $15.14 trillion, following 15% growth in 2017 and 4% growth in 2016. Active and passive assets under management are based on a subset of money managers that have provided data for all years since 2014.

Mr. Collie also noted that hits to equity markets filtered through to the assets of the 20 largest money management firms in the ranking, whose assets fell 4.8% to $38.7 trillion as of Dec. 31. For the 500 largest managers, aggregate assets under management fell 3% in 2018 to $91.5 trillion.

"The single biggest factor would be market performance," Mr. Collie said. "When the index goes down, that causes assets to go down."

The MSCI All Country World index fell 9.4% in 2018, compared with a 24% gain the previous year. The Russell 3000 index lost 7% in 2018, compared with a gain of 18.9% in 2017. The MSCI Europe index lost 14.9% vs. a 25.5% gain the previous year; and the MSCI AC Asia Pacific Net Total Return U.S. Dollar index lost 13.5% in 2018, following a 31.8% gain in 2017.

The 10-year compound annual growth rate of the top 20 firms was 6.6%, outpacing that of the 500 largest managers at 5.5%. Over a five-year period, the CAGR for the top 20 was 4.3%, and 3.7% for the top 500 managers.

Across the top 500 managers, equity and fixed-income allocations continued to make up the majority of assets under management. Equities accounted for 43.6% of portfolios in 2018, down from 46.2% in 2017. Fixed-income's share of portfolios rose to 34.4% from 33.3% in 2017.

The remainder was made up of alternatives at 6%, up from 5.3% in 2017; cash at 7.7%, up from 7.2% a year earlier; and other investments at 8.3%, up from 8% in 2017.

All data in the survey are converted into U.S. dollars. The euro depreciated 4% against the dollar in 2018, but gained 14% in 2017. The pound sterling lost 6% against the dollar in 2018 after gaining 10% a year earlier. The Chinese yuan gained 5% against the U.S. dollar in 2018 and lost 7% in 2017, while the Japanese yen gained 3% vs. the dollar in 2018 and gained 4% in 2017.

Mr. Collie said the finding that assets managed by the top 20 fell is "interesting in the sense that it's not what we would have expected — the general trend has been an increase in concentration and the expectation is that this industry is going to consolidate. There are hundreds of asset managers, and it seems like it's an industry where the middle is going to get squeezed."

But the numbers tell a different story this year, with median AUM of the 500 largest managers up 3.5% over the year to $45.6 billion.

"Had those numbers gone in the other direction, we would have said it was evidence of continuing concentration in the industry — in this case, it is not what the numbers are saying, so (it) is a slightly surprising data point in that sense," Mr. Collie said.

Assets run by the top 20 managers represented 42.2% of the total, down from 43% last year. These firms run between $962.3 billion and $6 trillion in assets. The next set of managers ranked 21st through 50th — running between $449.8 billion and $946.8 billion — saw their share fall to 22% from 22.8%.

The data show the share of assets under management for money managers in places 51 through 250, whose assets range from $46 billion to $423.1 billion, grew to 29.9% in 2018 from 28.5% in 2017. Managers at the smaller end of the scale — in places 251 through 500 and running between $8.9 billion and $45.2 billion — also saw their share increase, to 5.9% from 5.6% the previous year.

Assets under management by region were damaged by falling equity markets in 2018.

AUM for North America-based firms was $51.9 trillion at the end of 2018, accounting for 56.7% of total assets in the top 500. Aggregate North America assets fell 4.8% over the year. In 2017, U.S.-based assets under management accounted for 51.7% of the total, down from 53.2% in 2017.

"If you look at where the world's assets are and where the world's assets are being managed, the U.S. is overrepresented among asset managers," Mr. Collie said. The Pensions & Investments and Thinking Ahead Institute's research into the world's 300 largest retirement funds showed U.S. asset owners represented 45.2% of a total $18 trillion assets as of Dec. 31.

Where the data did show growth was in China, Mr. Collie pointed out. The share of AUM for China managers rose to about 2.7%, or about $2.5 trillion, in 2018 from about 1.2% of total assets in 2017 and just 0.31% at the end of 2013.

"The net (value) of available assets to invest is growing in places like China," Mr. Collie said, which "allows the domestic asset management market to grow just on the back of domestic assets — (money managers there are) not having to sell outside their own markets to have opportunities to grow."

While it might be too early to call an industry trend in terms of asset share, Mr. Collie said the data are encouraging in terms of what it might represent.

"One of the things that has been high in my mind for a number of years is when you look at the asset management industry as a whole, because it's becoming more globalized and there are more connections around the world, we're getting more similarities" when it comes to management, staff and investment styles.

"So occasionally you need a breath of fresh air. It's important to the market that we have truly diverse asset management activity," Mr. Collie said, highlighting that diversity within active management is particularly important.

"If half the assets are managed by people looking from different perspectives and emphasizing different things, that's a pretty vibrant market; if it's all just the same type of people hiring the same type of people, it's a less vibrant market," he said. "Playing into that story, you have the beginnings of the establishment of a significant asset management community in places like China and other different markets than where we've traditionally been looking. We hope that this can bring a very new perspective on asset management, and create a richer, more diverse community for asset management globally," Mr. Collie added.

Assets managed by firms in Europe fell 3.9% in 2018 to $28.71 trillion, dropped 0.4% in Japan to $4.5 trillion, but grew 17.9% for managers domiciled in the "rest of the world" to $6.39 trillion.

Longer term, China also showed the highest compound annual growth rate in both local currency and in U.S. dollar terms at 24.3% and 21.6%, respectively, over the past four years. India-domiciled firms recorded a five-year CAGR of 25.6% in local currency and 22.7% in dollar terms; at the other end of the scale, Norwegian-based managers experienced a 0.3% growth rate in local currency terms but a 6.5% loss in dollar terms over five years. U.S.-based managers recorded a 4.1% five-year CAGR. Eurozone countries had a five-year CAGR of 4.8% in euro terms and 1% in dollar terms; and Japanese-based firms recorded a 0.7% CAGR in local currency and a 0.3% loss in U.S. dollar terms.

The application of environmental, social and governance factors to money management remained stable and continued to show growth in 2018.

Assets allocated to ESG principles grew 17.8% in 2018 to $8.92 trillion.

Factor-based strategies, however, lost assets in 2018, with allocations falling 6.2% to $1.71 trillion. Figures are based on a subset of managers that have provided relevant data for all years since 2014.

Looking ahead, Mr. Collie said a trend playing out for money managers is the recognition of "the importance of culture within firms. … It's not just a nice-to-have: It's actually pretty much the heart of the firm — especially in a people business like this. We are seeing a trend toward people being more deliberate and conscious about culture," he added.

Markets drag down AUM at largest firms