Asset Managers Facing Near-Zero Growth in New Money

(Bloomberg) -- Investment managers unprepared for five more years of slow deposits won’t be protected by an improving economy and a resurgent stock market, according to a new study on the industry.

Firms globally will see annual growth from new client money of 0.6 percent through at least 2017, consulting firm Casey Quirk & Associates LLC said in a paper published today. Many managers will struggle with shrinking revenue as much of the growth will be concentrated in companies that specialize in niches such as alternative-investment strategies, or that sell to customers in emerging economies.

“Market appreciation at any level won’t be enough to save asset managers focused on selling outmoded products to slower- growing investors,” Benjamin Phillips, a partner at the Darien, Connecticut-based firm, said in an interview.

U.S. mutual-fund companies were headed for record deposits in January, mostly in stocks, as the Standard & Poor’s 500 Index rose 5 percent. That rally, building on gains in three of the past four years, raised hopes among market bulls for a so-called great rotation out of bonds and into stocks, a shift that would further boost equity values. Asset-management firms typically charge more to manage stocks than bonds.

Long-term funds, which exclude money-market vehicles, attracted a net $64.8 billion in the first three weeks of last month, according to the Washington-based Investment Company Institute. The previous record was $52.6 billion for all of May 2009, according to the ICI, whose data go back to 1984.

Capital Appreciation

Asset managers globally enjoyed growth from deposits of 6 percent to 7 percent in the three years through 2007, according to Casey Quirk. The next four years, marked by the piercing of the U.S. housing bubble and the subsequent financial crisis, saw growth of close to zero.

Industry revenue will rise to $483 billion in 2017 from $352 billion in 2012, according to the study. Capital appreciation is projected to account for 89 percent of that growth. The study, which doesn’t single out any companies, covers mutual-fund providers, private equity, hedge funds, bank- owned firms and other investment managers.

Companies that provide cheap indexing or multiasset products such as asset-allocation funds and target-date retirement funds will fare best in the slow-growth climate, according to Casey Quirk.

Vanguard’s Record

Vanguard Group Inc., known for its index-based mutual funds and exchange-traded products, attracted $24.3 billion in January, a record for the Valley Forge, Pennsylvania-based firm. Among all U.S. providers, mutual funds categorized by research firm Morningstar Inc. as alternative or balanced gathered $33.3 billion in 2012 while dedicated stock funds had $104 billion in withdrawals.

Balanced funds hold a mix of stocks and bonds. Alternative investments can include hedge funds, private equity and commodity holdings or mutual funds that seek to mimic those strategies.

The main sources for new money will be wealthy individuals in developed markets and the burgeoning number of investors in emerging-market countries, according to Casey Quirk.

Firms that rely on traditional actively run stock and bond funds will suffer unless they provide a clear investing philosophy that delivers absolute gains, not just performance above benchmarks, according to the study. Active managers select securities while index funds are designed to simply track market or industry benchmarks.

“Managers need to modernize themselves and find ways of making their strengths relevant to what investors want,” Kevin Quirk, a partner at the firm, said in the same interview.

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