It’s the year most industries reached never-before-seen lows, the world economy suffered the worst downward spiral since World War II, and things took such a left-field turn ‘unprecedented’ became the word of the year.
Yet, against all odds, asset managers ended 2020 on a high.
Despite the turbulent economic climate, total assets under management grew by 10% in Europe and 11% globally compared to 2019. But while this (and other numbers we’ll get to in a bit) make it look like the industry is as strong as it’s ever been, things aren’t as positive as they seem at first glance.
Here’s what went well and what didn’t for asset managers in 2020, and a look at what this means for the industry moving forward.
What’s behind asset managers’ impressive performance in 2020?
So how did the industry prove so resilient in the face of — there goes that word again — unprecedented turmoil?
According to McKinsey, it’s down to three factors:
- Market confidence in a quick recovery during the initial downturn
- Previously unheard-of levels of government intervention
- Vaccine rollouts
When lockdowns and other face-to-face restrictions shut down the world economy, the markets sank to all-time lows. But hope of a v-shaped recovery — a sharp drop quickly followed by a sharp rise back to normality — meant many investors saw an opportunity to buy valuable assets cheaply and capitalise when the market rebounded. This is why net inflows increased.
“…investors,’ speculates Morningstar analyst Bhavik Parekh, ‘were probably just looking for exposure to the market… [hoping] they could see their investments increase by 20% or 30% in a very short period.”
Of course, the v-shaped recovery didn’t happen. A second and third wave of infections led to further lockdowns. And the UK and EU economies aren’t expected to bounce back until at least 2022.
That said, low interest rates, other government measures aimed at mitigating the pandemic’s economic impact, followed by news of successful vaccine trials, sustained market confidence. So, net inflows continued, hitting record highs of €2.4 trillion (around £2.1 trillion) globally and increasing Europe’s overall profit pool by €20.6 billion (around £17.6 billion).
When profit isn’t positive
If market resilience, government intervention, and science helped asset managers pocket healthy profits in 2020, the picture isn’t completely rosy.
Like the vast majority of other industries, the pandemic forced asset managers to change long-standing ways of working, creating new challenges and risks.
More to the point, the typical asset mix is changing. And unless the industry adapts, the changes will make asset managers less profitable.
Even before the pandemic, passive products and money-market funds were seeing double-digit growth. But in 2020, passive inflows hit new highs of €285 billion (around £243 billion), while inflows into money-market funds soared to €240 billion (around £205 billion). Meanwhile, costs were up compared to 2019, and profit margins shrunk by 3%.
The key take-away, reckon McKinsey, is that asset managers’ record performance in 2020 was mainly down to ‘…the tailwinds of a buoyant market…‘
Had events unfolded differently — if, for example, market confidence had tanked — it would’ve been another story.
So how can the industry ensure their success is down to operational rather than market factors moving forward?
The structural trends shaping Europe’s asset management landscape
According to McKinsey, there are five key trends that’ll impact asset managers’ prospects moving forward:
- Current monetary policy
- The consequences of government intervention during the pandemic
- ESG’s popularity
- Ever more rapid digitalisation
Low rates, low returns
Europe’s had low interest rates for over a decade.
Except for a brief period between 2016 and 2017, the Bank of England’s base rate was 0.5% for 9 years. It rose to 0.75% in 2018 — still miles away from its 2007 peak of 5.75% — only to decrease to 0.25% in 2020 and 0.1% in 2021.
Similarly, rates in the Eurozone have been low or negative since 2014.
Covid-19’s economic impact means low interest rates are here to stay for the foreseeable future. So interest in lucrative, actively managed fixed income products — an asset class whose growth stalled in 2020 — will likely decrease further.
The Covid-19 debt spiral
Countless sectors wouldn’t have survived 2020 without furlough schemes, grants, and other government support. The trade-off is that EU members’ deficits are now expected to soar by as much as 102% of GDP by the end of 2021, while the UK’s borrowing was 99.4% of GDP in December 2020.
This debt will have to be repaid, and the business landscape may change dramatically as a result.
Government stakes in private businesses — including controlling stakes — may become more commonplace, which managers will have to consider when developing portfolio strategies.
The road to sustainability
If sustainable investments thrived in 2020, their prospects in 2021 and beyond are looking even brighter.
Investors are getting more serious about environmental and social impacts. And with 37% of the EU’s €672.5 billion (around £574 billion) Covid-19 recovery fund reserved for green projects — the UK is putting climate-friendly initiatives at the heart of its recovery plans too — interest will continue to grow.
For asset managers, this boom isn’t just an opportunity to create new products with better returns and positive outcomes for the planet. It also means getting to grips with complex reporting obligations.
Complying with the EU’s Sustainable Finance Disclosure Regulation will require access to huge volumes of data many asset managers have never collected before. So, having the right technology in place — like Fundipedia’s module for collecting, organising, verifying, and disseminating data, including data related to sustainability reporting, for instance — is going to be critical.
With lockdowns and other physical restrictions disrupting supply chains, both retail and business customers are increasingly going local. And this holds true across all sectors.
McKinsey reckons that, in Europe, this trend will have two impacts on asset managers.
Firstly, cross-border ventures are likely to become more challenging — not only due to supply chain issues, but because, since Covid-19 regulatory responses have diverged somewhat, even within the EU.
At the same time, investors are more likely to want to invest in ways that reflect their practical realities. So asset managers will need to start offering more locally-focused products.
The digital explosion
The single biggest impact of the pandemic has been rapid digitalisation.
Digital adoption among European consumers jumped from 81% to 95% during 2020. But the industry also made huge strides. Firms achieved five years’ worth of digital progress in just a few months.
In a world of rising costs, shrinking margins, and an ever expanding compliance burden, growing comfort with technology is a positive thing. Automation, machine learning, and APIs eliminate human error, make compliance simpler, and can slash admin costs by as much as 30%.
But digital technologies are also an opportunity to offer customers more relevant, personalised products, at the moment and on the channel that makes most sense.
Every challenge is an opportunity, and Covid-19 is no different
2020 put the asset management industry through the ultimate stress test. And while they came though in a position of strength, it won’t all be plain-sailing from here on out.
The good news is they’re more in control of their destiny than they might think.
There will be huge challenges ahead in the coming years.
But these challenges are also opportunities. Opportunities to take a leading role in a more climate-friendly future. To create more sustainable, highly personalised products with better returns. And to increase their efficiency and become more effective and agile.
But only if they have the right tools and technologies in place.
Want to learn more about how Fundipedia can help you adapt more quickly and be more effective, efficient, and agile in the coming years?