The Age of Asset Management

Finally got around to reading Bloomberg Businessweek's Asset Managers are the New Banks. Should have been more prompt.

One of the more disquieting parts of covering banking regulation is how often, in an interview, either a regulator or a banker will say something like this: Regulators have to treat banks with some respect. If they clamp down too hard, the money will go somewhere else, to a place we only dimly understand. Beyond the banks, the logic goes, there be monsters.

In a speech last week to a group of asset managers in London, Andrew
Haldane, in charge of financial stability for the Bank of England, began to map out the land of the monsters. The number of people saving money in the world has grown larger, older, and richer, he said. Life expectancy is rising—as is population and per-capita GDP. And all these rich old people need to put their savings somewhere. It is not going into savings accounts but instead into a category known as assets under management, or AUM: pension funds, exchange-traded funds, hedge funds, private equity.

AUM in the U.S. was about half of GDP in the 1940s; it has now grown to almost two and a half times GDP.

Read Haldane's speech.  Conventional asset management, where funds are managed by stock and bond pickers, is being squeezed between high-cost alternatives, such as hedge funds and private equity, and low-cost index funds and ETFs. Old-fashioned prudent investing seems to have succumbed to the temptation of market timing. Just like the much maligned small investor, many pension funds tend to buy high, sell low.

The good news: Asset management should continue to boom globally. "In China and India, personal financial assets have grown at a rate of 25% per year for the past 20 years."