Has the traditional asset class management hit tipping point?

A housing development in Nairobi. Alternative asset classes include real estate. FILE PHOTO | NMG 

By RUFUS MWANYASI
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After the crash of 2008, the asset management industry benefited from a market rebound that
produced the longest bull market in history. Total assets under management (AUM) have grown from Sh3.85 quadrillion to Sh8.9 quadrillion thanks to strong market performance (contributing roughly three-quarters of the AUM growth) and net flow figures.

North America remains the world’s largest asset management region. Retail clients represent 42 per cent of the global assets and stand at Sh 3.7 quadrillion. Institutional clients account for 58 per cent of the global assets. Last year, the MSCI World Index realised a 27 per cent return for the year – it’s strongest since 2009, when it achieved a return of 35 per cent.

But a new trend is building that necessitates a major shift. The rise in non-traditional return profiles driven by alternatives is something worth paying attention to. According to the BCG Global Wealth Report 2020, this asset class now comprises nearly half of all global asset management revenues, despite representing only 16 per cen t of AUM by 2019.

Projections estimate this asset class to hold 49 per cent of global revenues and represent 17 per cent of global AUM by 2024, up from 10 per cent in 2003. On the contrary, active core products (equities, bonds, bills) have seen their markets share of global assets fall by nearly half since 2003, from 60 per cent to 33 per cent, while their share of global revenues has dropped dramatically, from 41 per cent in 2003 to less than 20 per cent by 2019.

Why is this important for our local asset managers? One is performance. Remember private asset classes have outperformed public markets across globe over the past two decades. Sadly, in the Kenyan market, alternatives (represented by immovable assets and private equity) account for less than five per cent of the total AUM while government securities (treasury bonds and bills, infrastructure bonds), fixed deposits and listed equities take up 50 per cent, 26 per cent and 12 per cent, respectively.

This means the opportunity cost paid by investors is massive. Another point is cost pressure. Fixed expenses – in particular, people costs – are high, and that reality limits short-term cost-control options.

Sadly, with three local funds controlling 62 per cent of the total AUM (Sh 76.1 billion), it means the other 21 approved funds could be keeping “high” fees just to stay alive.

But with the industry facing fee-compression - the BCG report shows that revenues as a share of average global AUM have decreased from 26.2 basis points (bps) in 2018 to 25.3 basis points bps in 2019 – this model is unsustainable.

In the end, asset managers who survive are those that innovate and evolve to fit the new realities ahead. It’s possible the local status quo remains in place because investors are satisfied with returns. But for forward-thinking asset managers, the changing face of the global asset management industry presents the opportunity to make structural changes in such areas as product innovation and growth strategies.

For the near-two dozen fund managers with sketchy AUM, the alternative space is an interesting growth space. Of course, this also means policy makers and chiefly, the regulator will need to create the right environment for this to happen.