Money man­agers, los­ing ground for years, may soon lose their jobs

The fund busi­ness braces for shrink­ing prof­its and as­sets Maybe con­sol­i­da­tion will help? “Just the op­po­site is true”

Bloomberg Businessweek (Europe) - - CONTENTS -

Even af­ter the shock of the fi­nan­cial cri­sis, man­ag­ing other peo­ple’s money re­mained a pretty great busi­ness. While banks shed jobs, em­ploy­ment at the largest pub­licly traded as­set man­agers rose about 20 per­cent from 2008 to 2015, ac­cord­ing to data com­piled by Bloomberg. Now top ex­ec­u­tives at some of the largest fund com­pa­nies, in­clud­ing Larry Fink at Black­Rock and Gre­gory John­son at Franklin Re­sources, are warn­ing that a reck­on­ing is com­ing.

The pain is fo­cused on com­pa­nies that em­pha­size ac­tive man­age­ment— pick­ing stocks and bonds in an ef­fort to beat the mar­ket. Those com­pa­nies haven’t fared well com­pared with ri­vals of­fer­ing cheaper funds that mainly track in­dexes. Fund ex­ec­u­tives en­vi­sion a fu­ture of shrink­ing as­sets, lower profit mar­gins, and more merg­ers as com­pa­nies try to adapt.

“Large firms are talk­ing to large firms,” says Joseph Sul­li­van, chief ex­ec­u­tive of­fi­cer of fund com­pany Legg Ma­son. “There are a lot of con­ver­sa­tions go­ing on at high lev­els.”

Sev­eral com­pa­nies have trimmed jobs re­cently. Pa­cific In­vest­ment Man­age­ment, whose Pimco To­tal Re­turn was once the world’s largest mu­tual fund, cut its work­force by 3 per­cent, or 68 peo­ple, af­ter as­sets de­clined by a quar­ter from the peak three years ago. “Pimco con­stantly ad­justs its re­sources to cap­i­tal­ize on chang­ing mar­kets and in­vest­ment op­por­tu­ni­ties,” spokesman Michael Reid said in an e-mailed state­ment.

GMO, known for the con­trar­ian views of co-founder Jeremy Gran­tham, has cut about 10 per­cent of its 650per­son staff in a re­trench­ing that fol­lowed a sharp de­cline in as­sets. Tucker Hewes, a spokesman for GMO, de­clined to com­ment.

Over the past five years pas­sive funds, which mimic in­dexes, at­tracted a net $1.7 tril­lion in the U.S., while ac­tive funds saw a slight out­flow. The ac­tive man­agers haven’t been able to show they de­liver a per­for­mance edge for their higher fees: In the five years ended in De­cem­ber, only 39 per­cent of ac­tively man­aged eq­uity mu­tual funds beat their bench­mark in­dexes, ac­cord­ing to Morn­ingstar. Bond man­agers haven’t fared much bet­ter. In the past two cal­en­dar years, three-quar­ters of tax­able bond funds trailed the mar­ket av­er­ages.

“The re­al­ity is that in­dex­ing is tak­ing over,” Franklin CEO John­son told the Fi­nan­cial Times in early June. Eq­uity in­dex funds charge their own­ers as lit­tle as 0.05 per­cent of as­sets each year, com­pared with a weighted av­er­age of 0.82 per­cent for ac­tive stock funds.

Franklin, a big player in in­ter­na­tional stock and bond funds, cut 1 per­cent of its global staff of about 9,400 in Fe­bru­ary. The firm suf­fered re­demp­tions of more than

“It’s pretty clear that ac­tive man­agers have not per­formed above their bench­marks to any great de­gree.” ——Peter Kraus, Al­liance­Bern­stein

$20 bil­lion in each of the last three quar­ters. Its best-known fund, the $48 bil­lion Tem­ple­ton Global Bond Fund, un­der­per­formed sim­i­lar ones over the past year.

Fink, who runs the world’s largest money man­ager, with $4.7 tril­lion un­der man­age­ment, said at a con­fer­ence on May 31 that the shift into in­dex­ing will not only con­tinue but will be “mas­sive.” He cited new rules from the U.S. Depart­ment of La­bor that re­quire fi­nan­cial ad­vis­ers rec­om­mend­ing in­vest­ments for re­tire­ment ac­counts to put their clients’ in­ter­ests first. That could push ad­vis­ers away from rec­om­mend­ing so-so prod­ucts that hap­pen to of­fer sales com­mis­sions, and to­ward lower-cost in­vest­ments like in­dex funds.

Black­Rock would be rel­a­tively well­po­si­tioned for such a shift, since it of­fers a mix of ac­tive funds and in­dexbased prod­ucts such as the iShares ex­change-traded funds. Still, the firm has cut about 400 jobs, or roughly 3 per­cent of its 13,000 em­ploy­ees, peo­ple with knowl­edge of the mat­ter said in March. It will con­tinue to hire in key ar­eas and ex­pects to end the year with a higher head count, one of the peo­ple said at the time.

Sean Healey, CEO of Af­fil­i­ated Man­agers Group, which owns a col­lec­tion of bou­tique mu­tual fund and hedge fund com­pa­nies, says con­sol­i­da­tion won’t solve the in­dus­try’s fun­da­men­tal prob­lem of per­for­mance. “Just the op­po­site is true,” he says. Hav­ing to put more money to work of­ten makes man­agers less nim­ble.

Peter Kraus, CEO of Al­liance­Bern­stein Hold­ing, said in an in­ter­view on Bloomberg TV in June that “it’s pretty clear that ac­tive man­agers have not per­formed above their bench­marks to any great de­gree.” He es­ti­mated as­sets in ac­tively man­aged funds may have to shrink by as much as 30 per­cent to re­store their abil­ity to beat in­dexes. For a busi­ness based on reg­u­larly col­lect­ing a lit­tle slice of those as­sets, that cure would hurt more than the dis­ease.

Charles Stein

The bot­tom line Fund man­agers who try to beat the mar­ket mostly fail, and their busi­ness may be about to get smaller.

Fink Fund flows since 2011

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