The first six months of 2022 have been challenging for the UK asset and wealth management industries with a difficult macroeconomic environment bringing pressures to many firms in the market.
According to Morningstar data, UK funds suffered their worst month of outflows in May 2022 since the height of the pandemic. Investors withdrew £4.3bn over the month as inflation, increasing interest rates, and a worsening economic outlook brought panic to the markets.
Lang Cat principal Mark Polson says these macro concerns have hit asset managers where it hurts; their AUM-based revenue models.
“We’ve seen some of the shine come off the share price of key industry participants as flows slow, tech debt starts to become better understood and percentage-based fees take that same hit as investors are taking in their portfolios – but perhaps there was irrational exuberance in the first place,” says Polson, who also points out the 10+ years since the global financial crisis may have lulled some into a false sense of security.
“There is a generation of product builders, designers, and analysts who have never experienced significant and sustained headwinds,” he adds.
“It will be a time of change for many – corporate activity will continue but perhaps some of that exuberance may fade a little.”
Widespread damage
This market malaise has hit even the most established fund groups. May’s Morningstar data shows Aviva, BlackRock, and Baillie Gifford each recorded outflows of £1bn or more. Even the UK’s largest fund, the £23.7bn Fundsmith Equity fund was not immune and recorded £622m of outflows – its largest monthly outflows on record.
These conditions have impacted both asset and wealth managers, though Assetco CEO Campbell Fleming remarks: “Arguably wealth managers have fared relatively better.”
“For some, the MPS portfolios they manage have somewhat shielded them from the more servere declines in markets. Whereas asset managers, particularly those that profited for many years from growth stocks, have suffered.”
NextWealth managing director Heather Hopkins concurs and has seen the financial advice aspect of business models as making a difference when sentiment changed: “Financial advice firms tell me that new business has slowed but they are retaining their existing relationships. But again, income will fall if assets decline.”
“For instance, appetite to buy financial advice firms remains strong – and with good reason. Assets are sticky and recurring revenue streams are strong, making them appealing.”
See also: Vanguard Lifestrategy funds rake in £1.9bn despite shakier performance
Share price hits
The fallout has been clear in share prices, with many major asset and wealth names in the UK market having underperformed the stock market in 2022.
According to FE fundinfo, the FTSE All Share lost -4.82% in the six months to 20 June 2022. In that time, the share prices of AJ Bell, St James Place and Hargreaves Lansdown lost -27.36%, -31.61%, and -41.48% respectively. IntegraFin, the holding company of investment platform Transact, lost -55.78% over this period.
Listed fund groups have not fared much better with shares of Jupiter (-39.94%), Abrdn (-30.79%), Schroders (-24.04%) and Premier Miton (36.83%) also in the red over the period. Liontrust has suffered a particularly brutal decline, with shares down 55.14% since the start of the year.
However, Man Group and M&G are outliers, with the former up 8.36% and the latter down just 1.63%.
On the wealth management side, Brewin Dolphin is also an anomaly, with the DFM’s share price surging from £3.70 to £5.08 in that same period. Enjoying ‘buy’ ratings from many analysts, Brewin Dolphin is currently in the middle of being acquired by Royal Bank of Canada – a move that has instantly made the latter the third-largest wealth manager by AUM in the UK and Ireland.
The performance of wealth firms can depend on how these businesses have marketed their proposition to clients. Redington managing director of wealth Nick Blake says firms’ bold pitches from wealth managers can come back to haunt them.
“It’s still the case that many firms’ implicit promise is ‘we’ll beat the market for you’…and their clients become uncomfortable when that clearly isn’t happening,” says Blake, in contrast to wealth firms that prepared their clients for years like 2022 ahead of time. “Typically, when markets are troubled, the phone rings far less in this type of wealth practice.”
More of the same
With no end in sight to current economic headwinds, UK asset and wealth managers may likely continue to face a challenging operating environment.
These pressures will impact firms differently and those with scale on their size may be in a better position, explains Fleming, who expects to see more M&A activity in 2022 (the CEO says his own business remains open to both organic and inorganic growth).
“It’s those firms in the middle that are under the greatest pressure,” he says. “Mid-sized players are sluggish when it comes to adjusting their business models and are more likely to be encumbered with dated IT systems. Perhaps most importantly, their product ranges are out of date.”
A recent note from Numis highlighted consolidation opportunities in the UK, with data showing the top 10 players have a 36% market share and the top 25 have 56%. BlackRock – the biggest asset manager in the world – only has a 9% share.
Pressures on AUM may continue, and Blake expects scale to push through more deals this year – evidenced by the trend of asset managers buying platforms and wealth firms.
“It remains to be seen if the valuations are driven by a competitive market and/or to what extent dampened asset values – and future revenues from them – reduce valuations,” he says. “One thing is certain: the adage ‘Distribution is king’ remains true.”
