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.