Passive assets at all-time high for world’s largest managers

Passive assets run by the 500 largest global money managers increased to an all-time high at the end of 2019, recovering from a 9.7% decline in 2018, while overall assets under management grew 14.8% to $104.4 trillion.

The annual ranking by Pensions & Investments and Willis Towers Watson PLC's Thinking Ahead Institute showed that passively managed assets increased 25.3% at the end of 2019 to $7.87 trillion.

Active assets under management increased 12.5% to $25.17 trillion, following a 3.8% decline in 2018, according to the research. Active and passive assets under management are based on a subset of money managers that have provided data for all years since 2015.

Marisa Hall, co-head of the Thinking Ahead Institute in London, said the trends in the money management industry are a reflection of an increasing focus on fees and value for money by asset owners. The growth of passive over the last 10 years reflects rapidly advancing technology changing the shape of mandates and producing products that require less governance and are more streamlined, she said.

These trends have also become differentiators for those managers that can be "efficient on cost." Investors are looking for higher returns, for example, in areas such as private markets, she said. Investors are also moving away from investing that is focused on risk and return and into "3D" investing where impact is as important as risk and reward.

Following the outbreak of the coronavirus pandemic in late 2019, money managers' businesses suffered from a subsequent market downturn. COVID-19 has piled further pressure onto managers to enhance user-friendly and value for money propositions and investors' trust in their organizations, she added. Building more resilient portfolios able to withstand economic, societal or environment systemic risks is key for investors, she said. This can be done by investors understanding the level of risk that can be tolerated, maximizing diversity, removing unrewarded risk and carefully managing liquidity needs, she added.

Moody's Investors Service said Sept. 29 that it expects to keep its outlook for the money management industry in Europe at negative for the rest of the year as assets under management, revenues, cash flows and earnings remain highly correlated to the performance of financial markets.

Benjamin F. Phillips, principal and lead investment management strategist at Casey Quirk, a practice of Deloitte Consulting LLP, based in New York, said the pandemic and a shift to ESG-driven investing has been driving the resurgence in active management. "There is a debate that we will see that in the 2020 and 2021 numbers," he said.

But Mr. Phillips said the resurgence will occur less so because of the traditional active vs. passive debate. Instead, he said managers are required to add value in different ways as asset owners are implementing, for example, ESG strategies. "Most of the new revenues for the industry are going to come from private equity or private debt and I think you'll see a number of passive management firms change their (businesses) to have more exposure to private markets," he added.

The implementation of environmental, social and governance factors into investment strategies continued to grow in 2019. "Investors are looking for a value for money product that doesn't just do well (financially)" but one that does good, Ms. Hall added. "Managers are recognizing their role," she added, noting that they are realizing the industry is connected to society and that requires them to define what impact they want to have. The annual ranking's data support that realization. Assets allocated to ESG principles grew 42.9% in 2019 to $8.51 trillion. Assets allocated to ESG mandates increased by 14.4% in 2019 to $999 billion.

Also, half of money management firms increased the number of women and executives from ethnic minorities serving in top positions, according to the research. Still, 48% of managers did not increase, while 2% recorded a moderate decrease.

The 20 largest money managers in the world also saw assets grow 17.3% overall to $44.92 trillion in 2019.

The 10-year compound annual growth rate of the top 20 firms was 6.1%, outpacing that of the 500 largest managers at 5.4%. Over a five-year period, the CAGR for the top 20 was 6.7% and 6% for the top 500 managers. The median AUM of the 500 largest managers was up 9.6% over the year to $49.9 billion.

Equity markets lifted AUM in these strategies and led year-on-year AUM growth in 2019. Speaking about the market impact on the overall AUM increase, WTW's Ms. Hall noted that equities have had a "fantastic set of performances," but the asset class could be challenged over the coming years. Major global market equity indexes have broadly recovered from their lows in March this year but the shape of the recovery will be dependent on the fiscal and monetary support packages developed in response to the COVID-19 pandemic, she added.

The MSCI All Country World index was up 27.3 % in 2019, compared with a loss of 8.9% in the previous year. The Russell 3000 index gained 31% in 2019 , compared with a loss of 5.3% in 2018.

The MSCI Europe index gained 26.8% vs. a 10.1% loss the previous year; and the MSCI All Country Asia Pacific Net Total Return U.S. Dollar index gained 19.9% in 2019, following a 13.1% loss in 2018. All figures are total returns.

Across the top 500 managers, equity and fixed-income allocations made up the majority of assets under management. Equities accounted for 45.9% of aggregate AUM in 2019, up from 43.6% in 2018. Fixed-income assets were 33.8% of total AUM down from 34.4% in 2018. In 2019, alternatives were 6.3%, up from 6% in 2018; cash was at 7%, down from 7.7%; and other investments were at 7%, down from 8.3% in 2018.

"Volatility will drive portfolio construction," Mr. Phillips said adding that growth over the next five years will be shaped by discussions over environmental taxes, pandemic relief programs and potential financial disruption due to bankruptcies caused by the pandemic. Depending on whether private debt is considered a fixed-income asset classes rather than as part of alternatives, "we could see an increase in that category in the next years," he said. For some investors, a specific allocation to alternatives could disappear as investors consider all assets as either equity or debt, he said. Because the dollar markets have had to face interest rates at zero or near zero, the hunt for yield is going to lead to discussions about looking further afield for fixed-income instruments that pay higher coupons, Mr. Phillips added.

All data in the survey are converted into U.S. dollars. The euro depreciated 2.21% against the dollar in 2019 . The pound sterling increased 3.94% against the dollar over the same period. The Chinese yuan lost 1.22% against the U.S. dollar, while the Japanese yen gained 0.99% vs. the dollar.

Ms. Hall noted that consolidation in the sector is continuing at a faster pace than before, with the research finding that over the 10-year period ended 2019, 232 money managers dropped out of the list of the top 500 firms in the world. "We continue to see new firms popping out," Ms. Hall added.

Assets run by the top 20 managers represented 43% of total AUM, up from 42.1% last year. These firms run between $1.09 trillion and $7.43 trillion in assets. Managers ranked 21st through 50th, which manage between $545 billion and $1.09 trillion, saw their AUM fall to 21.2% from 21.9% of the total share.

The data show that money managers in places 51 through 250, whose assets range from $50 billion to $543.9 billion, grew as a share of the market to 30.3% in 2019 from 30% in 2018. Firms in the second half of the top 500, running between $9.6 billion and $49.9 billion, saw their share decrease to 5.5% from 5.9% the previous year.

Casey Quirk's Mr. Phillips said private markets players' AUM as well as that of quantitative providers are rising quickly.

There were also changes to the manager lineup in the top 20. Capital Group Cos. Inc. moved ahead of Bank of New York Mellon Corp. and Amundi in the 2019 ranking to the seventh position, growing its assets 22.6% to $2.06 trillion in 2019 from $1.68 trillion a year earlier. BNY Mellon and Amundi dropped to the eighth spot and the 10th spot, respectively. AXA Group dropped off the top 10 list and into 21st place in the ranking and was replaced by Goldman Sachs Group Inc., which moved up to the ninth place from the 11th spot . Goldman Sachs increased its AUM 20.8% to $1.86 trillion in 2019 from $1.54 trillion a year earlier.

New managers entered the top 20 in 2019, with Invesco and Morgan Stanley joining the group for the first time, at 16th and 19th places, respectively.

Invesco's AUM grew 38.1% over the year, to $1.23 trillion. Morgan Stanley, which agreed to acquire Eaton Vance Corp. on Oct. 8, increased its institutional and wealth assets to $1.13 trillion in 2019 from $916 billion a year earlier. The firm's investment management unit AUM at the end of 2019 was $552 billion.

Assets run in factor-based strategies increased in 2019, with allocations growing 18.7% to $2.23 trillion. Also, assets managed in liability-driven investment strategies grew to $3.70 trillion in 2019 from $3.41 trillion a year earlier. Figures are based on a subset of managers that have provided relevant data for all years since 2017.