Fund managers turn their focus to millennials
When Jay Jacobs pitched the idea of an exchange traded fund focused on companies targeting millennials, older colleagues in the room groaned and rolled their eyes.
But Mr Jacobs, the 29-year-old head of research and strategy for Global X, a New York-based ETF specialist with $10.9bn under management, persisted. He argued that this much-maligned cohort — with their tattoos, cold-brew coffee and avocado toast — represented a compelling investment theme and, ultimately, he won his Gen X colleagues around.
“People like to laugh about millennials but the data are irrefutable,” said Mr Jacobs. “The old clichés about living with their parents and not being serious about their careers are wrong.”
Other fund management groups are catching on, betting that the economic heft of the 2bn-strong generation that grew up with the internet, in the past two decades of the 20th century, will come to define the fortunes of industries around the world. Asset managers are now crafting strategies to back companies that can capture millennials’ preferences — at a time of unrelenting pressure on their own top lines.
Investment products that target millennials naturally include technology stocks but also focus on builders that specialise in starter homes and apparel companies. The largest stock holding in a Millennial ETF launched three years ago by Principal Global Investors, for example, is Adidas, the German company that has benefited from a partnership with Yeezy, the clothing and sneaker line of rapper Kanye West.
Such moves by giant companies could be smart. In the US, millennials will account for three-quarters of workers by 2030. Higher incomes will push the group’s spending 17 per cent higher within five years while Baby Boomers (born between 1946 and 1964) will spend 10 per cent less, according to Goldman Sachs.
“Demographics matter,” said Paul Kim, head of ETF strategy at PGI in New York. “The buying power of millennials as the largest demographic group in the US means they will have a tremendous impact on . . . the global economy.”
Chief executives are taking note. Mentions of the term “millennial” on US corporate earnings calls jumped from a dozen in 2008 to 612 last year, according to FactSquared data compiled for the Financial Times. Brian Moynihan, Bank of America’s chief executive, claimed last week that the bank’s 16m millennial customers between the ages of 25 and 41, who represent about $200bn in deposits and investments, were attracted by the company’s “digital capabilities”.
BlackRock’s chief Larry Fink, meanwhile, noted on his second-quarter earnings call that “millennials are much more adept at using technology and we need to be at the forefront of helping them”.
The sale of funds with a millennial theme offers a rare bright spot in an otherwise bleak outlook for asset managers. Across the developed world, fund management firms are struggling to adjust to a radical shift towards lower-cost, passive investing.
For fund managers, millennials are not just the basis of investment ideas, but are also a vital clientele that will represent $15tn in assets in the US alone within two decades, according to Deloitte data.
“As millennials earn more, they are starting to build wealth and are an important client segment to focus on,” said Kathryn Koch, co-head of fundamental equity for Goldman Sachs Asset Management, which oversees $1.5tn in assets. Three years ago Goldman rebranded one of its equity strategies as the Global Millennials Equity Portfolio, a mutual fund that charges a fee of 1.9 per cent, dropping to about 1.1 per cent for institutional clients. The fund’s assets stand at $101m.
“This is a demographic we want to cater to over time,” said Ms Koch.
Winning them over may not be easy. Millennials could warm to the environmental, social and governance funds currently in vogue but might bristle at supporting large multinationals such as BlackRock or Goldman that dominate the fund management business. Millennials’ preference for low-cost products could also limit the contribution of themed funds to revenues.
“Millennials will be big buyers of asset management products in the future even though they haven’t been in the past,” said Amanda Walters, a senior manager at Casey Quirk, a division of Deloitte. “Asset managers are looking for any way they can to address this growing pool of capital.”
For now, the sums invested in funds branded with the millennial tag remain modest. Global X has assets of just $66m in its Millennial ETF, while PGI has $21m. But the numbers could be set to grow.
“Millennials will represent a large base of wealth — capturing [them] today will be important for the future,” said Ms Walters. “Asset managers want to know how to get millennials in the door and then keep them.”