The second quarter of 2018 has seen the local S&P/ASX 200 Index (Index: ^AJXO) (ASX: XJO) deliver flat returns so far, but the investment management sub-sector has printed some big falls over the last month.
Famous asset managers such as Perpetual Limited (ASX: PPT), Magellan Financial Group Ltd (ASX: MFG), AMP Limited (ASX: AMP), Challenger Financial Group Ltd (ASX: CGF) and BT Investment Management Ltd (ASX: BTT) have all printed 52-week lows over the month of April.
While Platinum Asset Management Limited (ASX: PTM) is down around 30% over 2018, but still a fair way off a 52-week low.
This despite the local share market trading sideways recently and being a long way off its own 52-week lows.
While European and US equity markets are generally higher over the past year with reasonable outlooks despite the usual geopolitical risks worrying investors.
Elsewhere the big banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are either planning to sell-down or have already sold substantial stakes in their respective funds management businesses of Colonial First State Global Asset Management and BT Investment Management.
So what's going on?
That's a good question and not easy to answer.
Some of these businesses like AMP have their own specific problems, but a more general problem affecting them all is the rising popularity of exchange-traded funds (ETFs) or passive investment funds that offer investors exposure to a whole index or or sector of an index for example.
Not only are these ETFs taking market share from the active fund managers in terms of fund inflows, but they're also increasing pressure on the active managers to lower their fees.
Active fund managers earn revenues as a fixed percentage of funds under management (FUM) and just a small drop in fees can have a big impact on bottom line earnings especially when magnified by a loss of FUM.
Leading the investing revolution into index-tracking funds is the appropriately named Vanguard.
According to the New York Times it was estimated to be putting US$2 billion a day into of investors money into its index funds.
In the U.S between 2015 and 2017 it reportedly scooped up 8.5x more funds than the entire active asset management industry put together.
Evidently, active asset managers are facing a serious structural threat which may be one of the reasons why both CBA and Westpac are looking to sell down stakes in their asset management assets sooner rather than later.
I own shares in Magellan Financial Group Ltd (ASX: MFG) and am inclined to sell down the holding, although not at prices around $23 which I consider under-valued given its outlook.
I also own shares in Macquarie Group Ltd (ASX: MQG) which is essentially an asset manager that does some investment banking on the side these days. However, active equity management is only a small part of its business, compared to a pure equity manager like Magellan.
As such I'd still rate the adaptable Macquarie Group a buy and expect its capital markets facing business may have started 2018 better-than-expected thanks to a return to volatility across markets. Macquarie will report full year results in early May.
Another good quality asset manager based out of the US and UK largely is Janus Henderson Group (ASX: JHG), which operates in the fixed income, alternatives and equities space to give it some insulation from the rise of index funds.
