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Shifts in industry-wide AUM to favour unconstrained long strategies, smart beta products and liquid alts

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In an effort to narrow the gap between dynamically managed, multi-asset institutional portfolios and the current set of static, single asset class or balanced retail fund offerings that combine just equities and bonds, asset managers are increasingly likely to bundle together three growing product sets into new packaged retail solutions that combine portfolio construction, risk management and investment oversight into a single investment fund.

That’s the conclusion of Citi’s 6th Annual Industry Evolution Survey. The findings are based on one-on-one interviews with 100 firms globally, covering investment managers with USD25 trillion AUM (35% of the industry’s total) and investors and intermediaries with AUM of USD5 trillion.
Convergence between asset managers, hedge funds and private equity firms is resulting in an explosion of new product creation and complexity, Citi notes. Rather than looking at products individually, investment managers surveyed for the report expressed their belief that in the future these offerings will be seen as building blocks to create bespoke solutions for institutions and packaged solutions for retail clientele. New dynamically managed multi-asset class solutions (MACS) targeted at retail will include an unconstrained long core, liquid alternative exposure and risk hedging via an emerging set of Smart Beta tools that isolate specific risk factors.
Growth in these products is expected to outstrip gains in actively managed and passive benchmark funds that tie their performance to distinct market indices. Based on 5-year CAGRs, Citi projects AUM in the publicly traded fund space to expand from USD40.8 trillion in 2014 to USD56.9 trillion by the end of 2019. Strategies tied to market indices will decline from 84% to only 76% of that pool.
“Many in the asset management industry discuss the industry becoming increasingly passive, but our research shows that the industry is instead likely to become more active in the next 5 years as asset managers’ reassert their trading skills away from market indices,” says Sandy Kaul, Global Head of Business Advisory Services within Citi’s Investor Sales unit. “Rather than running 95% to 100% invested against a specific market index, we see active long only managers moving to strategies that will run between 80% and 120% net long with this asset pool projected to grow from an estimated USD6.8 trillion in 2014 to USD14.9 trillion in the coming five years.”
Citi’s survey finds that unconstrained long strategies will eclipse passive benchmark fund growth to become the second largest asset pool in the publicly traded fund space by 2019. Passive benchmark AUM (across separately managed accounts, mutual funds and ETFs) is seen rising from an estimated USD6.7 trillion in 2014 to USD10.7 trillion by the end of 2019. Actively managed long only benchmark funds will continue as the largest asset pool, but proportionately these strategies are losing market share, Citi reports.
Growth in the ETF space is also showing a shift to a more active investment approach that looks beyond market capitalisation-based indices. “Managers are creating a whole new set of products that exist on the divide between active and passive fund management. They are looking to isolate single or multiple factors from their investment models and systematically create new funds that tilt the indices to create a specific exposure,” says Jim O’Donnell, Global Head of Investor Sales at Citi. “These Smart Beta products are being used individually as risk management tools by institutional investors and they are being packaged into multi-asset class solutions for retail investors.”
AUM in Smart Beta and actively managed ETF products is projected to rise from USD265 billion in 2014 to USD1.1 trillion by the end of 2019 – more than a 4x increase – making this the fastest growing product set in the asset management industry, Citi finds.
Liquid alternatives are the final product set targeted for inclusion in the new multi-asset class solutions. These products allow investors to access strategies that have traditionally only been available to qualified purchasers in privately traded funds. With recent growth in both 1940 Investment Company Act alternative funds and alternative UCITS funds, there are now a set of offerings that can provide mass affluent and retail investors’ access to alternatives exposure to help expand their asset class diversification, Citi’s survey finds.
Liquid alternative AUM is seen as more than doubling in the next 5 years from USD817 billion in 2014 to USD1.7 trillion by the end of 2019 according to Citi’s projections. These publicly traded funds are seen rising from 10% to 15% of the total pool of alternative funds as growth in privately offered funds (hedge funds, private debt and financing and private equity products) is not expected to increase as quickly—rising from USD7.1 trillion to USD10.0 trillion in the corresponding period.
“Creating a more resilient, flexible and diversified portfolio solution for retail and wealth clients is a priority for the asset management industry to help manage the wave of retirement money coming from the baby boomers in coming years. For the first time, the product set available to retail and wealth investors now includes all the building blocks previously available only to qualified purchasers, but the majority of wealth advisors are not skilled in constructing and managing such portfolios. Packaging a solution for this audience will speed the change in the industry and help financial advisors that are moving from commission-based to fee-based compensation models fulfil their role as fiduciaries,” Kaul concludes.

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