An exodus from equities to the relative safety of corporate bonds, government debt, gold and even good old-fashioned cash is over. Some bond yields have fallen to zero or less in inflation-adjusted terms and a slowdown in the Chinese economy and sluggish global growth sent gold into freefall. So, with shares back in fashion, asset managers with the greatest exposure look well-placed to outperform the rest.
Small wonder, then, that the equities guys are rubbing their hands. This doesn't mean that they were poor performers while investor preferences strayed elsewhere. In fact, the sector outperformed the wider markets by a country mile last year. What has changed, however, according to the Investment Management Association, is that while corporate and strategic bonds were the investment instrument of choice from January through to August 2012, equity sales since then have been the most popular investment conduit.
Moreover, UK equities still look cheap when compared with the record highs notched up by equities in the US, while government debt looks overvalued and corporate debt fairly valued at best. According to Numis Securities, while global equities have moderately expensive valuations compared with medium-term averages up to 10 years, they look relatively cheap against longer periods. The current 12.7 one-year forward PE ratio, for example, is around 20 per cent below the 20-year average of 15.8, but is above one, three, five and 10-year averages. Set against this, government debt looks expensive from almost any angle, especially since yields have only one way to go - up - which means that anyone buying in at current inflated prices potentially has a lot to lose. And, most recently, the prospect of yields rising as a result of higher inflation has been brought sharply into focus by the radical measures introduced in Japan to stimulate economic growth.
Equity investors have also become less hooked to their domestic market. UK equity allocation in all UK managed assets fell from 59 per cent in 2006 to 37 per cent in 2011, while asset allocation in emerging markets increased from 2 per cent to 13 per cent. Given that there is a reasonable link between rising GDP and growth in company earnings, emerging markets have a greater potential to deliver superior returns until more mature economies begin to grow at a decent rate. Of course, this comes with a large health warning because investments in emerging markets are more prone to high inflation and political instability, not to mention exposure to foreign exchange fluctuations. Even so, most investors appear underexposed to developing economies, but this could change as it becomes clearer that a significant bulk of global growth in the short to medium term will come from outside the established western markets.
| Company | Share price | Last reported AUM | AUM breakdown | AUM asset breakdown | ||
| (£bn) | Retail % | Institutional % | Equities % | Fixed income % | ||
| Aberdeen Asset Management | 454p | 212.3 | 45 | 55 | 58.5 | 17.6 |
| Jupiter Fund management | 319p | 29.1 | 88 | 12 | 77 | 23 |
| Rathbone Brothers | 1,454p | 18 | 100 | 0 | 70.1 | 22.7 |
| Ashmore | 398p | 46.4 | 9 | 91 | 9.9 | 90.1 |
| F&C Asset Management | 98p | 95.2 | 12 | 88 | 27 | 64 |
However, not all asset managers are the same. Each places a far different emphasis both on asset allocation and the make-up of its client base. Given the prospect of stronger returns, those with a greater exposure to emerging market equities may expect to have better prospects of asset appreciation, and this is crucial because management fees are charged on the size of the assets managed. The client base is more complex, but equally important. Retirement-related funds make up around two-thirds of all the money managed by asset managers. That includes pension funds themselves, life insurance companies and public sector investments. It's fair to assume also that a decent chunk of the 18 per cent of investments held by private individuals is earmarked for old age.
The point is that the pension world is changing, with company-run defined-benefit pension schemes disappearing quickly. By and large, these are being replaced by defined-contribution schemes still run on behalf of employees, but which eliminate company exposure to uncertainties such as longevity. Furthermore, there will be a greater opportunity for employees to have a greater say in how and where their pension pot is invested, and more people will realise that their retirement nest egg is inadequate. It is clear, then, that those asset managers with a larger mix of retail savers have the potential to grow faster. Typically, saving for a pension will come through a self-invested personal pension (Sipp) personally managed, but more likely managed by an asset manager. The exact mechanics of this have been changed recently following the introduction of measures enshrined in the Retail Distribution Review (RDR), which outlaw commission payments on products sold. Initial nerves are likely to disappear quickly as savers come to terms with paying a fee instead. The most obvious benefactors from this trend would appear to be St James's Place (STJ) - with its own in-house advisers - and Hargreaves Lansdown (HL.).
Asset managers are beginning to change in other ways, too, because as net debt to equity ratios continue to decline - Aberdeen Asset Management (ADN) and Jupiter Asset Management (JUP) are already debt-free - the prospects of a larger dividend payout increase sharply. That's partly why these two companies are our sector picks.
IC VIEW:
Current trends favour those asset managers with most exposure to equities and retail investors. Yes, pension fund money remains the major contributor to funds under management, but that will change over time as defined-benefit pensions disappear and more people take some control over where their pension funds are invested. RDR has come as a wake-up call for some asset managers to reconnect with the retail side, and those with a head-start such as Jupiter should prosper.
