Winner takes all – myth or reality?

Time to Occupy Wall Street?

Received wisdom is that major asset managers are taking ever-larger bites out of the investment pie, leaving smaller players to lick around the edges of the bowl; if you are small – or even mid sized – you may as well pack away your knife and fork and go home. Increasing regulations, shortening buy lists, the rise of passive investment and the importance of brand are all cited as valid reasons to justify the winner-takes-all hypothesis. I have one slight issue with this analysis: it’s wrong.

Let’s get back to basics with a simple examination of long-term assets under management in Europe. In 2002, the top-10 groups had 38% of all assets – a large share but hardly a monopoly, falling somewhat short of even half of total industry assets. The intervening years have given rise to the winner-take-all theory – but how did these winners fare? Here’s the rub: in the past 15 years, the share of assets managed by the 10 largest groups declined, sinking to just 27% by 2010 and sitting at 26% today (March 2017). Of these groups, the outright leader’s share (BlackRock) has grown – but only marginally. In 2002 the largest group (UBS) controlled 5% of industry assets; today it is BlackRock, with a 7% stake, 70% of which are invested in its passive funds.

We’ll have 100% each, please

So – no proof of consolidation in share of assets. But what of the sales picture? I actually suspect that much of the confusion around winner-takes-all comes directly from market-share readings of net sales figures. The only widely available industry sales statistic is, of course, net sales, and calculations based on these numbers are misleading, to say the least.

Let me elaborate. In 2016, the top-10 sellers collected €118bn, which works out as 111% of total net sales. That sounds like a winner-takes-all situation but this is not a valid statistic. Take the next 40 groups – they also accounted for 100% of that net sales total (honestly)? The net sales figure is exactly that – inflows net of redemptions, which equals a total figure that is often smaller than the inflows of some of the leaders.

Does BlackRock have more fun?

Not only are percentages misleading, they also don’t pay the bills. The important thing for asset managers is real numbers – preferably those measured in billions. In 2016, 63 groups had net sales exceeding €1bn. The €550bn elephant in the room, BlackRock, gathered €16bn of net flows. Meanwhile, at the other end of the scale, the 63rd group on our list – Woodford, a pint-sized manager with just €11bn under management – still took in €1bn, equivalent to 6% of the leader’s total.

None of this suggests winners-take-all. Far from it; success was spread across a wide range of groups – and products – with 773 funds seeing net flows of €250m or more each last year. The success of Woodford neatly demonstrates that it’s not just big groups winning either. On the contrary, size is no guarantee of success; of the 20 largest groups, nine were in net redemption in 2016, losing an average of €6bn apiece. Casting the net wider its worth looking at group size in terms of number of funds on their menus. A simple split into groups with 30 funds or more vs fewer than 30 funds shows that groups with more extensive product ranges gathered €76bn last year while those with more focused ranges collected €30bn, less than half as much. However, shift the focus to active management and we see that firms with concentrated fund lists sold nearly twice as much as those with extended ranges (€25bn vs €10bn in 2016). Amongst those doing well were Flossbach von Storch, Fundsmith, Carmignac Gestion and Muzinich, all generating net sales exceeding €2bn. In active management differentiation and innovation are key; size and breadth are not determinants of success for those characteristics.

Rise of the regulators

Small groups – like their larger peers – have to devote important resources to regulatory compliance. This seems to speak in favour of a move towards ‘winner takes all’ – big groups benefit from greater mastery of the regulatory constraints, and from the scope of their offerings. However, whilst the giants may have more resources to lob at the regulators, this goes hand in hand with a more complex business model, involving more funds and lengthier internal processes. Smaller groups may prove more nimble, and they have a clearer brand and product proposition, especially in the active space.

In reality each group will win or lose on its own merits and to try and paint all large firms as winners or smaller firms as losers is too simplistic. For now at least, mid-sized and smaller groups can sleep easy; the truth about the winner-takes-all theory is that winner-takes-some – but then so do others. At the end of the day it’s not size that matters but the quality of your overall proposition!