Traditional asset managers were able to count on rising equity markets to grow in 2017, but many are looking to other avenues, such as more hybrid strategies and a new emphasis on alternatives, to sustain growth as 2018 approaches.
Three-quarters of the largest publicly traded asset managers saw their assets under management expand from the third quarter of 2016 to the 2017 third quarter, according to an S&P Global Market Intelligence analysis.
Altering their business models has given several companies a boost. Managers have incorporated passive strategies, such as exchange-traded fund platforms, to drive growth. The development of hybrid management models that combine passive products with some active management is one of the rationales Moody's cited for changing its outlook on the industry to "stable" from "negative" in a recent report.
"Key drivers of the stable outlook are the emergence of new products that blend features of active and passive management and the use of passive instruments as inputs in active disciplines," the rating agency said.
The industry continues to see declining fees as competition with low-cost passive investment strategies drives prices down, and from incorporating those products into their own suites. Companies will have additional headwinds from the January 2018 implementation of European regulations intended to encourage greater fee transparency, Moody's said.
One factor that helps larger asset managers sustain growth is scale, which lets them absorb extra expenses for compliance costs and technology investments. But diversification is another key attribute, Keefe Bruyette & Woods asset manager analyst Robert Lee said.
Diversified strategies within equities and a diversified business model that also offers investments in fixed income, alternatives and multi-asset classes also helps, Lee said in an interview.
"Done well, it makes for more sustainable growth, but it doesn't guarantee it," he said.
Companies can also diversify their businesses on the distribution side, by selling through more retail and institutional channels and mixing in non-U.S. channels with domestic ones, Lee said.
Invesco Ltd. has been looking for growth by shifting some investment products originally designed for institutional clients into retail channels, CFO Loren Starr said during a recent conference.
"I think we're still probably in the early innings in terms of what we can do there," Starr said, according to a transcript.
As traditional investment yields have tightened, asset managers can also develop products that meet the growing demand for alternative strategies, Lee said. Because alternatives tend to command higher fees, companies can scale that business line with fewer assets, he said.
BlackRock Inc. has been growing its alternative business under the radar, President Robert Kapito said at a conference. The company has gathered $100 billion in capital for alternative strategies, Kapito said, according to a transcript.
"So in a [stealthy] way, I guess, we are in alternatives, and that has become even more important as yields remain very low on fixed-income instruments," he said.
The newly signed tax reform law should give asset managers a one-time boost, but lower taxes would not be a driver of growth, Lee added.
"I don't know that it changes any managers' growth outlook or profitability outlook," he said.