• November 28, 2022

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What is the new normal? Both investors and asset managers are resetting investing in 2022’s new environment—in the first six months of this year, equities declined with the S&P500 down more than 20 percent for its worse half-year performance in over 50 years, and fixed income declined by 10 percent for its worse half-year performance in over 100 years.

In their annual asset management report released last week, “The Great Reset: North American Asset Management in 2022”, McKinsey discusses a changed markets environment with three major impacts on the North American asset management industry-

  • The asset management industry started 2022 in a position of unusual robustness, with strong inflows and performance from 2021. The global industry hit a high-water mark of $126 trillion of assets under management (AUM), a figure representing 28 percent of global financial assets, up from 23 percent a decade ago. And North America remains at the top of geographical rankings with the highest growth in revenues and assets under management, and revenues reaching a record $526 billion.
  • Institutional and retail investors are under immense pressure as traditional investing paradigms have been upended (see exhibit below).
  • The investment environment has called into question some of the defining foundational trends of the asset management industry in the past ten years, including the internationalization of products and clients, growth of risk-on and leverage-oriented business models, and commoditization of bulk beta.

The report also details how long-standing industry trends may shift—though McKinsey expects much to stay status quo near-term.

  • Active management remains under pressure. One would expect that recent market actions would be a catalyst for a possible active comeback, but at the half year 2021, 55 percent of active equity managers were still underperforming their benchmarks, about the same as for 2021.
  • Exchange-traded funds are set to dominate, reaching new records in 2021 with cumulative flows of $900 billion. A notable pattern to watch is outflows of active funds followed by inflows into corresponding ETFs, such as for tax loss harvesting.
  • Demand for private markets investing continues, with special interest in 2022 for yield-oriented and inflation-protected strategies.
  • Focus on sustainability is on the rise, although near-term there is uncertainty around rules. The emergence of higher-quality consistent data and clearer standards will help.
  • Preference for total portfolio solutions, rather than one-off investments, is growing in importance.

McKinsey concludes that the best approach for asset managers to manage today’s uncertainty involves building “all-weather” asset management platforms that are flexible, stable, and scalable—a recommendation striking this columnist as most realistic for the already-market-leaders.

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