Who is tapping into the axes of growth?

The asset management industry is still adjusting to the new state of the world after the financial crisis. Low returns, lack of trust in financial services, and a shifting balance of global economic power have altered the landscape for investment managers.

Almost a decade and a financial crisis after Morgan Stanley’s Huw van Steenis first elaborated his “barbell” thesis, in which he predicted the bulk of assets would be invested in low-cost passive or index-hugging products, with a small but significant amount in high margin, high “alpha” strategies, Mr van Steenis’s latest report sees this theme continuing to play out, with clear winners and losers in the industry.

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The losers are companies with performance issues, such as New York-based Artio Global Investors, which recently closed its poorly performing US equities fund range, and AllianceBernstein, which has seen assets dripping away for some time due to poor performance in its flagship institutional equities platform, or Janus and Pzena Investment Management.

European-focused hedge fund providers like Man Group and Gottex are also seeing outflows, as have a number of asset managers owned by banks, such as Deutsche Asset Management and Credit Suisse.

The report identifies six “axes” that will drive growth: exchange traded funds; income; multi-asset vehicles; the shift from developed markets to emerging markets; best-of-breed alternatives; and liability driven investment. It analyses the performance of 60 listed or captive asset managers in the first six months of this year, and “reinforces our view that growth is concentrating in players able to tap our core allocation growth themes”, says Mr van Steenis.

The companies that have seen the fastest growth in assets under management, Wisdom Tree (where net new money (NNM) was 43 per cent of pre-existing assets) and Vanguard (34 per cent NNM), are garnering the benefits of having the right product for the moment, in ETFs.

In absolute terms, the biggest winners are Allianz, which took in $55bn NNM, and BNY Mellon, with $33bn. Allianz’s figures include bond giant Pimco, while the Morgan Stanley report attributes BNY Mellon’s success to its participation in the LDI sector. Its specialist provider Insight Investment saw its assets rise by more than 50 per cent in 2011 (according to an FTfm UK pension fund manager survey).

ETFs took 57 per cent of total mutual fund flows in the US in the first half of 2012, with the money largely flowing into equity funds. Morgan Stanley predicts these low-cost index trackers will make further headway in fixed income and non-US markets, and are likely to be first to benefit from a pick-up in flows.

However, it warns that only huge players reaping the economies of scale, or those with distinctive products will survive as pressure on prices increases.

The search for income is well documented, with investors looking to corporate credit, high yield bonds and emerging market debt to offer them better yields than the historically low yields available on core bonds such as US or UK government debt.

Alternative credit markets, such as loans for leveraged buy-outs, real estate loans or collateralised debt obligations are likely to see increasing inflows, predicts Morgan Stanley, based on the experiences of Japan, which has long experienced ultra-low government bond yields.

Of the top 10 sectors attracting European mutual fund flows, eight are fixed income focused, ranging from emerging markets bonds to global high-yield. In the US, fixed income funds saw average net new money of 15 per cent, while the only equity sectors that saw significant inflows were global or emerging market funds and income funds.

While Pimco, part of the Allianz stable, is an obvious winner in the search for income, the report also partially attributes M&G Investment’s respectable 11 per cent NNM to its ability to find yield for investors.

With risk management top of many investors’ minds, multi-asset products are doing well. JPMorgan Asset Management, Schroders, Standard Life and BlackRock are among the beneficiaries of this trend, as are T Rowe Price and Invesco.

The reallocation from developed to emerging markets has been gathering pace over the past few years. Not only do many emerging markets have higher economic growth than most developed markets, but many are in a better fiscal position. EM debt specialist Ashmore has done well out of this, as have Franklin Investments and Aberdeen.

There has been relatively little demand for alternatives, but that does not mean there is nothing going on in the sector. With the top five listed alternative players gathering 15 per cent of all industry flow, concentration is increasing significantly, as investors become more discerning in their allocations to such managers.

Switzerland’s Partners Group is the principal winner from this trend, seeing NNM of 19 per cent, although Blackstone saw higher absolute inflows ($14bn as opposed to Partners’ $3bn). Morgan Stanley expects lacklustre demand for hedge funds to continue, but bewails the lack of appropriate illiquid offerings, which might attract long-term investors who could lock up their money for longer periods in return for improved yields.

Following a relatively concentrated period of cost-cutting, most companies have maintained operating margins above 30 per cent, but there is a broad range. Morgan Stanley’s estimates for 2012 range from 18 per cent at Man Group to 70 per cent at Ashmore.

This article is subject to a correction and has been amended since original publication to clarify M&G’s business offerings.