When to buy asset managers

Publicly traded asset and wealth managers in the UK have had a torrid time in 2022, with most suffering falls of over 20 per cent – noticeably worse than either the FTSE 100 or FTSE 250, where they are listed. M&G (MNG), giving its investors a total return of more than 5 per cent over the first 11 months of the year, and Man Group (EMG), with a modest loss of 3 per cent, were the best picks in the group. By contrast, several smaller asset managers were down by more than 40 per cent.

Longer time periods reveal several asset managers have delivered returns considerably higher than the market average, however. Impax (IPX), Liontrust (LIO), Polar Capital (POLR), Man Group and St James's Place (STJ) have all generated annualised total returns of more than 14 per cent a year over the past decade.

The contrast in asset managers' fortunes over the recent past compared with the longer term encapsulates one potential risk when investing in the sector, namely that it delivers so-called leveraged beta. Nick Brind, co-fund manager of the Polar Capital Global Financials Trust (PCFT), notes that, by their nature, asset managers offer a “geared play on equity markets”. In essence, when markets rise, so too does the performance of most funds, which in turn increases inflows to the products, both of which increase asset managers’ fee revenues.

Brind says this plays through into the management of his investment trust, which invests across the financials sector, where his cautious view on the markets over the past year is reflected in the fund’s limited exposure to asset managers. But if markets rise over the coming year this would mean asset managers “will be a great place to be”, he adds.

However, Ben Seager-Scott, head of multi-asset funds at wealth manager Evelyn Partners, says that while “there is an element” of fund companies offering leveraged beta, the view risks being “overly simplistic”. Seager-Scott says this is mainly a risk if investing in asset managers with an “especially narrow” investment style or in those managing only a handful of large funds. But these risks can be overcome by selecting firms offering a more diversified range of funds and that try to add value through innovation.

Will Riley, co-fund manager of the Guinness Global Money Managers Fund (IE00B7MJHM43), says asset managers’ higher beta is one of the “structural attractions” of investing in the sector, offering investors the means to outperform the market during periods of market strength. He also suggests the sector typically exhibits high free cash flow, which translates into higher average dividend yields than the broad equity market.

Riley says that asset management businesses tend to have very low gearing compared with other financial sectors, notably banks, which reduces their balance sheet risk. The comment offers an indication as to why he manages a fund with dedicated exposure to asset and wealth managers (as well as related stock exchanges and custody banks). The fund is a rarity, with other funds available in the UK offering broader exposure to financial stocks, often with significant exposure to banks.

There are a dozen financials funds included in the Investment Association (IA) and Association of Investment Companies (AIC) sectors, including three ETFs and one investment trust, which are spread across several sectors. To enable a more comprehensive comparison, the accompanying table also includes two funds that invest solely in listed private equity companies. Other financials funds have exposure to private markets but as a smaller part of their portfolios. Private market investment firms have enjoyed strong client demand in recent years and are generally expected to maintain their profit margins more effectively than traditional asset managers.

Many financials funds have managed to limit losses over the past year, despite broader market volatility, with an average return of 3.2 per cent. Funds with a 10-year track record can boast an average annualised return of 10.5 per cent, although this lags the MSCI All Country World and MSCI World Financials indices.

There may be investment opportunities to be found among funds investing in asset managers, but it is hard to look at these businesses without being struck by the extent to which the benefits of their profitability feed through to their employees.

It is perhaps unsurprising that the chief executives of 19 listed asset managers across the UK, US and Europe took home total pay of £5mn on average for 2021. But median pay for employees at 13 of these companies (where data is available) was still a healthy £118,000 last year. It may be a safer bet to work at an asset manager, rather than investing in one.

Ed Moisson's book exploring the business of asset management, titled The Economics of Fund Management (Agenda Publishing), is available from online bookshops