Refurb Your Enthusiasm

Even though BlackRock reported better-than-expected quarterly earnings last week, the investment management industry’s been under pressure to redesign the way it does business – and it finally seems to be listening.

 

🕰 Recap

  • Back in 2019, Morgan Stanley said it believed the future of wealth management was in “alternative” investments.
  • Last year, money was increasingly flowing out of high-fee actively managed funds and into low-cost exchange-traded funds.
  • In October, investors began pushing for two major investment managers – Invesco and Janus Henderson – to merge.
  • And last week, BlackRock announced fourth-quarter results that beat investors’ expectations.

 

✍️ Connecting The Dots

Let’s start with how investment management firms make money. Most charge a percentage fee on the amount of money they’re looking after – a.k.a. their “assets under management”, or AUM – which means the more they have, the more they earn. Testament to that is BlackRock’s stronger-than-expected fourth-quarter update, which was largely down to the fees it made on its $9 trillion pot of cash.

Still, the shift away from higher-cost actively managed funds and toward lower-cost, passive funds has led asset managers to earn less in fees on the same pot of money on average. And that’s arguably a good sign: you’re better off putting your money into passive funds that track the market overall than one that tries to pick out individual winning stocks – especially when most prices are basically rising and falling in unison, like they have been in recent years. Active management, meanwhile, comes with the risk your returns will underperform the market – and even if they don’t, additional performance fees could mean you end up doing roughly the same anyway.

Reality has bitten investment management firms hard, and now they’re in the third stage of grief: bargaining. They’re announcing mergers left and right, and even BlackRock’s promised to ramp up its efforts in socially and environmentally responsible investing. The hope’s likely that dealmaking – which combines firms’ AUMs – will generate more fee income and cut costs, which should boost profits. Plus, with more and more people – not least the incoming US president – focusing on a greener tomorrow, investment funds that put the environment first will hopefully attract more cash and more fee income too.

 

🥡 Takeaways

1. Investment managers are down with the kids.

Millennials are set to become five times richer than they are now, thanks in large part to the incoming transfer of wealth from their Baby Boomer parents: around $68 trillion’s expected to change hands by 2030. That means investment managers need to adapt or risk becoming obsolete. So by catering to the themes and trends – like environmental, social, and governance (ESG) – that matter to younger investors, asset managers are aiming to win them over early and build a profitable relationship that’ll last a lifetime.

2. But not out of the goodness of their hearts.

Of course, the funds that do attract the most capital can eventually look to raise their fees, safer in the knowledge that investors might be loyal to its strong performance. That would partly help investment managers restore their fee income to its former glory. And while ESG investments are one way they might hit those targets, there’s more than one way to skin a cat: Morgan Stanley, for one, is pushing alternative funds including real estate, hedge funds, and private equity. And given that only the well-heeled could invest in these assets directly until very recently, the firm will probably be able to charge investors high fees for access.

 

🎯 Also On Our Radar

On Wednesday, Affirm saw its stock almost double following its initial public offering. The consumer lender’s day one jump suggests there’s still ample investor demand for new stocks, even following the flurry of new share listings late last year. That shouldn’t necessarily be a surprise: investors might be keen to buy into anything that seems attractively priced, especially after US stocks hit another record high earlier this month.

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