UK asset management: falling markets fail to stem active decline

Spare a thought for Britain’s fund managers. Long under siege from the rise of passive investment and competition from retail platforms, they are now under assault from falling markets. Net mutual fund outflows last year were the worst since records began two decades ago, the Investment Association said. About £50bn left the industry, evenly split between retail and institutional funds.

Scale is strength in an industry increasingly dominated by US giants BlackRock and Vanguard. Each has close to $10tn of assets under management. UK managers are small in comparison. LGIM, part of insurer Legal & General, is the biggest with about $1.5tn AUM. Listed traditional managers such as Schroders, Abrdn and Jupiter are smaller still.

The retreat from the stock market was unsurprising given last year’s economic turmoil and tech rout. Less predictable was the scale of the outflows from the UK market. Retail investors pulled £12bn out of UK stocks, contributing to total net outflows of £34bn since 2016. That occurred despite the value-heavy FTSE 100 outperforming the rest of the world by 11 per cent since the start of 2022. Meanwhile, flows into tracker funds remained relatively strong, despite stockpickers’ hopes that the end of the bull market provided an opportunity to shine.

Schroders is trying to offset the shift away from mutual funds by expanding into private markets and wealth management. Two-thirds of fees came from traditional areas in 2019. That might fall to half by 2025, thinks Numis. Analysts expect last year’s outflows from asset management to total £7bn last year, according to Visible Alpha.

Schroders’ shares have rallied in line with global markets this year but earnings per share forecasts are where they were in 2017. At 15 times forward earnings, they are priced in line with their long-term average. That seems generous. It remains under pressure on flows and fees, while attempts to diversify are adding to costs.