Asset Management Industry Emerges Unscathed from the Pandemic – Institutional Investor

The global asset management industry reached an all-time high of $114.7 trillion in assets under management in 2020, according to a McKinsey report released yesterday.

That made 2020 the second-best year since the financial crisis in terms of AUM growth, according to the report. It was not just driven by performance: Net new flows of assets grew at 2.7 percent in 2020, just slightly down from 2019.

“In North America, 2020 was a story of the updraft in the U.S. markets in particular, in large part because U.S. media, technology, and healthcare companies were overrepresented in the circle of winners of the global pandemic economy,” McKinsey said in the report.

Yet even as assets surged, asset manager revenues and operating profits have grown at a slower pace. In North America, AUM grew at 13 percent last year, while revenues and operating profits grew at 7 percent and 9 percent, respectively.

McKinsey pointed out that despite the market shocks and the prolonged suspension of in-person interactions caused by Covid-19, the asset management industry has picked up some tailwinds as the U.S. economy quickly recovered to the pre-pandemic level. 

Among different asset classes, fixed income products were especially popular across both passive and active strategies. The net flows to fixed income reached $257 billion in actively managed funds and $230 billion in passively managed funds, according to the report. Fixed-income ETFs gained momentum among major institutional investors “as the resilience of these vehicles in the most volatile days of the pandemic helped to assuage prior investor concerns about liquidity,” the report said.

McKinsey attributed the growing interest in fixed income to three factors. For one, an aging population in North America means that asset allocations “are naturally shifting toward more stable yield-oriented assets.” There is also the cyclical factor that prompts investors to “rebalance their portfolios to maintain their target asset allocations.” But most importantly, active fixed income managers have consistently outperformed benchmarks and proved to be a reliable source of return. 

Private markets also attracted investors’ attention during the pandemic, and demand in asset classes like infrastructure, private equity, and private debt continues to grow, according to the report. More than half of investors said they expected to allocate more assets to infrastructure in 2021, up from 38 percent in 2020, as they believe that “governments and society will seize the pandemic moment and make significant commitments to rebuild and renew.”

Active equities, however, were under pressure as outflows from the asset class continued. In 2020, $330 billion in assets were withdrawn from active equities funds as “fewer than half of active managers outperformed their benchmarks after fees,” up from $282 billion in 2019 and $231 billion in 2018. 

Looking forward, McKinsey said that the themes that will define the asset management industry in the post-pandemic world would include digitalization, policy changes, innovation in business models, and concerns over environmental, social, and governance issues.

“As the industry crosses the horizon into this new post-pandemic era, asset managers will need to adapt their models to preempt the disruptions that lie ahead and adopt a new sense of purpose and innovation as they head into a unique decade of growth,” the report concluded.

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