Asset managers try to pick the best investments for their clients. In recent years, however, their own stock market status has taken a beating. UK asset managers have delivered an average annual share price loss of 15 per cent over the past three years, according to RBC Capital Markets, meaning they have significantly underperformed UK and European equity markets.
But as the likes of Abrdn (ABDN), M&G (MNG), Jupiter (JUP), and Schroders (SDR) prepare to publish their full-year results, some investors believe the sector has reached an inflection point.
Lamentable flows
Asset managers face structural and cyclical challenges. The shift from active to passive investing has been unfolding for many years and is well documented. When interest rates began to climb in December 2021, however, the backdrop for the industry became far worse. Higher rates caused even more clients to turn away from expensive actively-managed funds in favour of cash and bonds in tandem with an ongoing shift towards US-focused products.
Small caps such as Premier Miton (PMI) and Liontrust (LIO) – which focus heavily on domestic equities and mainly serve retail investors – have suffered protracted outflows, reflecting weak demand for UK stocks generally. “UK retail fund flows since the start of 2022 have been lamentable,” said one analyst.
The bigger, more diversified investment houses have encountered another problem too, relating to their single largest client type: defined benefit (DB) pension schemes.
“Over the last two decades, UK DB schemes have been gradually maturing and de-risking their assets from ‘growth assets’ such as equities, into ‘matching assets’ such as fixed income,” explained RBC analysts. This has been a headwind as growth assets attract “three to four times higher management fees” than matching assets.
Higher interest rates pushed many pension schemes from deficit into surplus, which prompted some trustees to accelerate the de-risking process. This means a “materially worse outlook for UK institutional flows”, according to RBC analysts, and puts UK asset managers in a tougher position than European peers such as DWS (DE:DWS) and Amundi (FR:AMUN).
There has been a great deal of boardroom upheaval as the industry has sought to tackle this plethora of issues. Abrdn and Schroders have both brought in new management teams, for example, appointing new chief executives last year.
Green shoots
There are signs of life, though. In January, active fund redemptions for the UK and European asset managers sat at negative €0.9bn (£0.75bn), according to analysis by UBS. Inflows clearly would have been better, but this marked the best month for flows since August. Asset managers saw positive movement into fixed income products, outflows from active equity funds and flat flows in multi-asset products.
The start of 2025, in which the likes of UK and European equity indices have started outperforming their US equivalents, has also been helpful.
Shares in asset managers have started to respond accordingly. Traditional European asset managers rose by an average of 9 per cent in January, according to UBS, with Schroders putting in a particularly strong performance, climbing by almost a fifth since the start of 2025.
The situation should continue to improve further. Lower interest rates are associated with better fund flows, and RBC analysts think Labour’s initiatives to bolster the London market could “reverse the trend of domestic investment aversion”.
This, combined with falling interest rates, should mean some of the UK consumer’s considerable cash savings are redirected to asset managers, according to the broker. This pot grew by £74bn in the 12 months to August 2024, according to RBC. In the meantime, individual companies continue to cut costs and diversify their offerings.
Globally, the picture also seems to be brightening. Credit ratings agency Moody’s has moved the outlook on asset management from negative to stable for 2025, reflecting expectations of lower interest rates and looser monetary policy.
“We expect the improved operating conditions to help accelerate the pace of global economic growth in the coming year, providing a healthy boost to investor confidence and company assets under management,” the agency concluded in its 2025 outlook.
Despite these green shoots, however, European asset managers remain on low valuations. At the end of January, the sector was valued at 10.9 times forward earnings, below its historical average of 12.8 times. “At these valuation levels, the market is pricing in strong outflows for the group,” said UBS.
It is too early to claim victory. The near-term outlook for flows remains very uncertain and the structural issues facing asset managers are largely unchanged. Meanwhile, US giants like BlackRock (US:BLK) and Goldman Sachs (US:GS) are intent on gobbling up new business.
The eyes of UK investors are likely to be fixed on dividends. The UK asset management sector offers an average yield of 7 per cent, according to Panmure Liberum, making it popular with income seekers. Some companies, including Premier Miton and emerging markets specialist Ashmore (ASHM), offer double-digit yields.
The sustainability of these payouts is increasingly being questioned, however. There are doubts whether Liontrust, for instance, which has a yield of 17 per cent, can sustain payouts if flows remain weak. “If flows do not improve in the next 18-months…the level of payout may need to be revised,” RBC argued.
More will be revealed when asset manager results season kicks off later this week.
