The passive investment trend is unevenly distributed across the planet, according to a new McKinsey&Co report, with Australia and Japan the world’s biggest index fans.
Almost 60 per cent of institutional money in Australia and Japan is indexed, the McKinsey study shows, compared to just 12 per cent in the rest of Asia and 17 per cent in Western Europe.
Passive strategies represented 58 per cent of the institutional market in Australia and Japan as at the end of 2018, down from 63 per cent four years previously: over the same period, indexing increased slightly in popularity among retail investors in the two jurisdictions, rising to 22 per cent from 19 per cent in 2014.
“The adoption of passive strategies varies largely from region to region, with North America, Australia, and Japan making up the majority of passive assets and growth,” the McKinsey report says.
“Western Europe passive market share lands somewhere between North America and Rest of Asia, with relatively moderate increases in share over the last five years across retail and institutional segments.
“Moreover, the penetration of passive assets still differs significantly by country, reinforcing the need for asset managers to consider local dynamics and not fall into painting regional opportunities with a broad brush.”
Total global assets under management (AUM) dropped by 1 per cent in 2018 – the first annual fall since the global financial crisis, the study says, as negative markets outweighed solid, if not spectacular, net flows.
Over the five years to the end of 2018, net investment flows totaled €9.7 trillion (NZ$16.4 trillion), bringing global AUM to over €77 trillion (about NZ$133 trillion).
“Asia-Pacific has been the largest regional driver of global industry growth, with China alone generating half of global net flows last year, primarily in fixed income and private markets (private equity, real estate, infrastructure), in addition to money market funds,” the report says. “Over the last five years, China and Western Europe contributed over 60 percent of global net flows, generated from a mix of retail and specific institutional client segments like insurance general accounts and corporates increasing assets outsourced to third-party investment managers.”
Since 2007 the number of global fund managers (or those with AUM of at least €10 billion – NZ$17 billion) was up 30 per cent, McKinsey paper says, as competitive forces weighed against consolidation pressures.
“However, despite the largest managers having achieved higher AUM growth, industry fragmentation has been sustained particularly amongst managers with less than €100 billion in AUM,” the study says.
McKinsey counted 344 global fund managers (as per its size restriction) as at the end of 2018, up from 264 in 2014. The number of mega managers with more than €1 trillion in AUM increased from two in 2014 to 12 as at the end of last year with this group growing assets by 63 per cent over the period.
Smaller firms (€10 billion to €100 billion) also saw average AUM increase by 16 per cent. While the number mid-range managers (€100 billion to €1 trillion) increase from 81 to 125 over the five-year period, AUM for this cohort fell by 6 per cent.
The report, which focuses on Western European fund managers, says despite the overall growth in AUM the industry was finding it more difficult to grow profits.
“Asset managers continue to struggle to improve efficiency at scale and to demonstrate sustainable operating leverage—a trend that has consistently challenged the industry to various degrees since the financial crisis,” McKinsey says.
The global consulting firm offers three strategies for fund managers to “unlock value” in the changing environment, namely:
- compete within the core – encompassing a range of strategies to shore up existing offers and evolve offers to meet current trends (for example, sustainable investing);
- move the boundaries – or “innovate selectively” in areas such as direct-to-consumer platforms or new distribution relationships; and,
- redefine the game – adding new business lines such as investment platforms or using blockchain technology “to tokenize previously illiquid assets”.
“Historically, succeeding in asset management was relatively straightforward, matching sources of structural wealth creation and growing retirement and liability needs, with sources of capital appreciation, income, and yield,” the report says. “However, the success factors behind the industry’s growth have become more uncertain, and will continue to evolve.”
Titled ‘State of the European asset management industry: Adapting to a new normal’, the study was produced by a panel of McKinsey consultants including Sid Azad, Pierre-Ignace Bernard and Cristina Catania.