Asset management is based on a pretty rudimentary covenant – the client provides the money, and experts or professional portfolio managers pick stocks or bonds to garner a profit – the goal is for both parties to win. However, this business has dwindled in 2016, according to a recent Bloomberg report, resulted in upwards of $50 billion in losses from just seven companies in the third quarter of the year.
This may seem surprising given the upbeat performance of many US markets, many of which sling-shotted out of a brief pullback wrought by the Brexit referendum in the end of June. Since then markets have been firmly higher, inking fresh all time highs. This performance has not translated to clients and their funds under asset managers however.
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Leading the list of asset managers bleeding money were Franklin Resources Inc. with $22.1 billion lost, AllianceBernstein with $15.3 billion lost, and Waddell & Reed Financial Inc. at $4.9 billion lost. This followed after a dismal Q2 in which this group also lost $34 billion in outflows, undermining confidence in the prowess and performance of managed funds, especially in the face of high management fees.
This trend was also evident amongst passive investments vs. active funds. Over the past twelve months ending Sept. 30, 2016, active funds yielded redemptions of $295 billion while passive took in $454 billion, according to data provided by Morningstar Inc. This trend has accelerated in recent years and is unlikely to reverse anytime soon.
It will be interesting to see how the asset management industry responds to these divergent flows as well as their respective clients. Following three straight quarters of negative performances, the elasticity of clients will be put to the test, which could ultimately prompt changes or an industry shakeup at years end.