US asset managers suffer as investors sit on cash

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Large US asset managers are pinning their hopes on a broad-based recovery in equity markets to lift their businesses after suffering billions of dollars of outflows.

Traditional equity and fixed-income managers have been hit hard as investors cut their risk exposure and opt to sit in money market funds whose yields have been pumped up by rising interest rates. More than $5.6tn is held in money market funds, according to the Investment Company Institute.

“We need better industry conditions,” said Rob Sharps, chief executive of $1.3tn manager T Rowe Price, which reported more than $17bn in net outflows over the past quarter. Sharps said he expected “very substantial net outflows” in 2024 and doesn’t expect flows to turn positive until 2025.

“People are being paid to wait with the highest rates they’ve been able to earn in decades in money market funds, and the world is a very uncertain place right now,” he said.

The Federal Reserve has lifted US rates from near zero to between 5.25 per cent and 5.5 per cent, maintaining that level at its latest monetary policy meeting this week. Futures markets suggest the central bank will keep rates on hold until about the middle of 2024.

Managers also said that the outperformance of a handful of large tech stocks in equity indices has also made it difficult for managers of balanced portfolios to outperform their benchmarks.

Just seven stocks make up 28 per cent of the S&P 500 by market capitalisation, and their gains have pushed passively managed funds higher. The rest of the stocks in the index have been largely overshadowed, diminishing the relative performance of active fund managers, who aim to hold more diversified portfolios.

“You have this huge concentration of seven stocks, and that’s risky,” said Jenny Johnson, the chief executive of active manager Franklin Templeton.

California-based Franklin, with $1.4tn in assets, experienced almost $7bn in net outflows in the latest quarter largely due to underperformance in its Western Core Plus fixed income fund, which was caught out by persistently high interest rates. “People are seeing volatility that they haven’t seen in a long time,” Johnson said.

Investors’ preference for cash rather than actively managed funds comes amid worries over wars in Ukraine and the Middle East.

“We are just in a period of geopolitical uncertainty that causes investors to sit on their hands, and you’ve been richly rewarded for doing it,” said Seth Bernstein, the chief executive of AllianceBernstein, which manages about $670bn.

The manager experienced modest outflows of $1.9bn in the third quarter, concentrated in its institutional, fixed income and passive equity portfolios. “Risk aversion, if it persists, is a real challenge for us. Because if people are paralysed . . . The markets will slow down,” Bernstein said.

Investor reluctance to put money into the market was likely to be a headwind managers contend with for some time, analysts said. “Higher-for-longer rates has meant not such great things for the asset management industry,” said Alex Blostein, an analyst at Goldman Sachs, who described 2023 as “a really painful year”.

But managers say there are early signs that more investors are wading back into markets. In mid-October, cash in US money market funds declined by $100bn, the largest weekly change since 2008, the ICI reported.

“Everyone’s starting to say, OK, it feels like it’s time to start redeploying to riskier assets,” Johnson said. “Once you start to feel comfortable that the Fed has moved to the end of the cycle, you start to move to risk-on and a little more duration,” referring to fixed-income assets that mature in the more distant future.