It is not an exaggeration to say that some fund managers have become very wealthy by simply looking after other people’s money…And their future remains bright: the huge rise in assets and investor base means more profits by the year 2020 and beyond.
Since the time when mankind developed organized economies, people have been hired to look after the wealth of the rich. Take the landowners of Akkad, an early Mesopotamian civilization. More than 4000 years ago, these landowners hired local managers to look after their farms.1
The business of looking after the wealth of others have, however, changed over time. It is now available to a wider range of individuals. In other words, it has become ‘democratized.’ In the past, it was individuals with low status who conducted investments on behalf of the wealthy. In the Roman Republic, for example, this important work was done by current or former slaves. In the Christian literature, there is the biblical parable of the talents which was explained as follows: a master entrusted his wealth to a range of servants. Two of the servants made some good investment and hence doubled their master’s money. The third servant, however, did not invest his master’s wealth. Instead of investing the wealth with the bankers to increase it, he buried it in the ground. This servant, which the master considered to be a poor performer, was severely punished: his master ‘cast him into the outer darkness where there will be weeping and gnashing of teeth.’ Today’s clients, whose wealth are managed by investment or fund managers, might welcome the ability to add this penalty clause to their contracts.2
If the experience of the last few years teaches us anything, it is that looking after the assets of the rich – or high net-worth individuals, as they are called in financial parlance – is still a big business. As a matter of fact, the fund management industry has grown significantly in recent years. The high growth recorded by the industry has been turbocharged by the evolution of a much wider client base. Most people who live in the rich world usually have some money available for savings after they have paid for the basic necessities, particularly food, shelter and clothing. In such countries, the retirement age is approximately 65 years. This implies that people who lives there have two decades or so of old age to provide for after their retirement. This simple fact has prompted them to save more for their golden years. In 1974, the total retirement savings in the United States was around $368 billion. By 2014, the value have grown to more than $22 trillion – a value that represents a fivefold increase in assets relative to income.3
This gigantic growth have indeed transformed the fund management industry. The industry was once a dull one. The main job of the key players in the fund management industry mainly involved helping trust funds stock up on government bonds. During that era, a standard joke used to describe the industry goes as follows: ‘Why don’t fund managers look out of the window in the mornings? Because then they’d have nothing to do in the afternoons.’4 These days, however, managing assets and investments for people is a much more glamorous profession. The fund managers of today are now regarded more as the masters of the universe than as the keepers of paper clips.
The industry’s reward system is another key to the change in its fortunes. Simply put, the fees charged by fund managers are linked to the value of their clients’ assets. This is a very lucrative model, especially given that the cost of managing a small asset is almost the same as the cost of managing a bigger one. For example, the cost of managing an asset that is worth, say, $12 billion is a little more than the cost of looking after one that is worth only $1 billion. Essentially, fund managers have benefitted in two principal ways: first, from the expansion of pension and other forms of savings. Second, from the huge increase in asset prices since the 1980s. It is worth bearing in mind that the increase in assets prices, which became more pronounced since the past three decades, was caused by low inflation and interest rates which have reduced the yields (and hence increased the price) of financial assets. During the financial crises of 2007 – 2008, the world financial markets faltered. To prevent a systemic collapse, the central banks stepped in to buy assets through quantitative easing(QE).5 By doing this, the central banks are indirectly subsidizing fund managers’ profits – an act that has huge resonance with the fund management industry.
It is thus not an exaggeration to say that some fund managers have become very wealthy by simply looking after other people’s money. As a matter of fact, as much as a quarter of all the billionaires in America work in the finance and investment industry. Worldwide, the finance and investment industry employs only less than 1 percent of all workers. Yet it appears to have more billionaires than the other sectors and industry. Whereas in ancient times the poor looked after the assets of the rich, the reverse is the case in modern times: the rich who work as fund managers look after the assets of the working class people.
While it is fair to say that successful managers deserve descent rewards, their current positions is slowly being eroded by the emergence of index trackers and exchange-traded funds. Also, even though these index trackers and exchange-traded funds charge much lower fees and can disrupt the industry, the transformation that would result from their emergence is not occurring fast enough.
One thing, though, is for certain: the future is still bright for fund managers. Over the past two or three decades, there has been an increase in the volume of investible assets worldwide. This trend is set to continue in the future and investible assets will be significantly higher in 2020 than today. Only a few fund managers would have shared this sentiment in 2008 or 2009 – the period when a major economic event affecting many people led to a temporary detour in the long-term growth path for assets management by investment managers. Even as assets prices recovered in 2010-2012, only a few fund managers believed that the rise in assets prices will be sustained.6 The truth is that the markets and the investors’ needs has continued to change since then. And these two factors will combine to produce a positive environment as well as huge opportunities for the fund managers through 2020 and beyond.
1Nemet-Nejat K.R.(1998). Daily Life in Ancient Mesopotamia. Westport, CT: Greenwood Publishing Group.
2Buttonwood: Living Off the People. (2016, March 5). The Economist. Retrieved March 30, 2016 from http://www.economist.com/news/finance-and-economics/21693964-history-investment-shows-how-managers-have-prospered-living-people
6PWC (2014). Asset Management 2020: A Brave New World. Retrieved April 27, 2016 from https://www.pwc.com/gx/en/asset-management/publications/pdfs/pwc-asset-m….