It is hard to gain a clear view into a business roiled by kinetic change. Asset management is such a business. We discern differences but not yet outcomes, although the outlines are coming into focus.
Let’s look at the changes, or at least the obvious ones. The shift to passive investing is massive and secular, but it has its limits and we are within sight of them. Fees, meanwhile, are moving south and will shift to more flexible and aligned constructs; this is a reflection of the transfer of power from asset managers to asset owners, and alignment of fee structures is already finding a new equilibrium. Distribution, too, is evolving: the sales-driven model is insufficient to meet the needs of intermediaries and asset owners, big or small.
The lessons taken so far from these changes are ill-conceived and all are drivers behind the incessant obsession with scale. Somehow the great asset gatherers of the past two decades are seen as the great asset managers. The scale players, the story goes, will inherit the earth: this is the age of BlackRock, Goldman Sachs, Allianz and Blackstone.
It is precisely the wrong conclusion.
Scale matters in some important parts of asset management. It obviously matters in delivering benchmark-matching performance. A handful of companies dominate exchange traded funds and indexing, and that won’t change. And scale matters in the very large end of the private investing market: the largest private equity, real estate and infrastructure deals run into tens of billions of dollars and only a handful of companies can play in that rarefied atmosphere.
Few of us live where the air is thin. Large-cap US equities and large-scale private transactions are just two parts of the universe of investment options. Even there, the biggest can seldom boast to be the best. The moment you step away from these asset classes, the advantages of scale disappear. We are beginning to understand that asset-gathering, too often viewed as the yardstick for success, is at best, only coincidental with good performance.
The age of asset gatherers has peaked and the asset management industry is re-entering the age of the boutique, where it began. What will matter is less size and more insight, which will support the outcomes sought by asset owners. Delivering that added value will require closer economic alignment between asset managers and asset owners.
Right over the investment spectrum, across myriad asset classes where capacity is constrained, from private credit to small-cap managers, where is the performance coming from? Invariably from small and midsized managers that do one thing well. And why not? In every other field of human endeavour, we appreciate the merits of focus. What is in the DNA of, for the sake of argument, JPMorgan Chase, that allows it to excel in the art of picking, say, small-cap US stocks? Or of Amundi to shine as a speciality finance lender? That they know how to raise money for any strategy under the sun cannot be the right answer for asset owners.
Technology has democratised asset management. As recently as a generation ago, a handful of Wall Street groups monopolised information technology. Since then, the largest buyside firms have levelled that playing field and now every boutique has access to Bloomberg, Amazon Web Services and much more.
Asset owners are the fabled sheep in the asset management business. In the past, you wined and dined them for mandates, and in the present you dazzle them with your brand. Who today gets fired for hiring Fidelity?
Both of these tropes are shop-soiled. Watch now for the well-established boutiques, management-owned and operated, managing a fraction of the trillions of the behemoths. They are big enough to clear all regulatory and technology hurdles, immersed in their field of choice, differentiated by their willingness to constrain their capacity, focused on asset management and not asset gathering, and comfortable with aligned fee structures. The scales are tipping — some colossi will survive but the smarter money will flow elsewhere.
Some of us have seen this before, especially if we have grey hair. Welcome, once more, to the age of the boutique.
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