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Barbell or Bell Curve?

There is an often-quoted expression in investment management that asset owners, institutional and retail, are increasingly dividing into two strategies, passive and alternatives, in a classic barbell formation, with traditional long-only active mangers being the squeezed middle.  Whilst we at marketßeta don’t necessarily disagree with this we do think it maybe an oversimplification.

In our opinion there is a more classic normal distribution curve of strategies as you move from passive large-scale managers who charge low fees to track the index to alternative niche active managers who charge high fees for differentiated performance.   As you move along the ‘risk/cost spectrum’ from passive (ETF, Non-ETF Index,) on the left to alternatives (structured products, hedge funds, PE&VC, Real Estate, Infrastructure, others) on the right. there is a both a mix of core active strategies (equities and fixed income specialists) as well as a blend of strategies that combine strategies across passive-active-alternatives strategies (Smart Beta, LDI, quant active, dynamic allocation solutions) in between. 

One of the best sources of data we found on the industry distribution by strategies is from the BCG Global Asset Management 2019 report.[1]  What may be surprising to many is that traditional active managers (Specialities and Core) are close to losing their top spot with only 51% of the industry AuM, as of 2018, down from 76%, in 2003. With year-on-year declines since the financial crisis, BCG predicts, they will decrease to 43% of AuM by 2023.  Increasingly higher AuM growth predicted for passives and alternatives is what gives rise to the barbell argument.Similarly, surprising is that despite the spectacular ETF growth in AuM over the last 25 years to ~$6tn, ETFs still lag structured products which have over $7tn in AuM[2].  Using BCG projections and our own interpretation:  by around 2023, our picture of the Bell Curve will have approximately 20% of assets in the passive bucket on the left, 40% of assets in the active bucket straddling the  middle, and the remaining 20% in our definition of ‘alternatives’ on the right.

Of course, the AuM growth, combines both market moves and aggregate net new capture. It does not describe the turnover within each strategy category. This turnover, we believe is also likely to increase in velocity.  Different strategies to succeed are needed in each of the 3 sections of our bell curve, passive, long only active and alternatives. We see these changes as opportunities to win at the expense of competitors and also opportunities for new entrants and innovative partnerships to enter.

Factors driving shifts in the bell curve and mandate turnover include:

  • Improving the value for money proposition at the scheme level[3].  

  • Incorporation of ESG to mandates.

  • Increasing utilisation of Smart Beta and Style Factors.

  • Differentiated content.

The implications are that the growth of passives (ETFs and Smart Beta strategies) are going to further reduce the revenues of the asset management industry in total.  All participants in the ecosystem will need to make a value for money case and evidence their differentiation to their peers and the other sectors to win and retain assets. 

In the alternatives sector, we are seeing signs of movement towards the commoditisation of content and innovative access products.  The less liquid the asset classes, the greater caution and governance is needed from investors (we do not believe that all asset classes are suitable for all investors). 

Therefore, as a result of these asset movements, we see the following requirements for managers to stay in the curve:

  1. Focus on Value for money: increasing importance of brand, proprietary content and operating model efficiency.

  2. But don’t just play defence: look for product and channel innovation, differentiated boutique model, firm boundary shifts and partnerships.

  3. Be clear about your value proposition: understanding the asset owner’s needs, investor education, content, making your case for alpha generation / beta delviery.

  4. Distribution & product strategy is critical, no matter where you are on the spectrum.

In order to win in the long run, asset managers will need to focus on all of these areas and have focused strategies for each.  The route to success, we believe, will increasingly come from a wide range of new blended solutions and innovative approaches.

Barbell or bell curve? We welcome your views on the ongoing debate. 

[1] Boston Consulting Group’s study, ‘Global asset management 2019: Will these ’20s roar?’, July 2019. 

[2] Bloomberg Professional Services, ‘Sure time to grasp the potential of structured products’, October 2019.

[3] Note that on many occasions mandates are repriced to retain, failure to do so would have resulted in asset movement.

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