Covid and its aftermath stirred up global economic turbulence on such a dramatic scale some predicted the investment world would struggle for years to overcome its consequences. Having enjoyed a decade of continuous growth, assets under management (AUM) were threatened with vast declines, driven primarily by shrinking assets in Europe and North America. From our vantage point in 2021, was AUM’s lost shine permanent or have they entered a new golden era?
Boston-based research firm Cerulli Associates cited a potential drop of US$ 1.7 trillion for AUM in 2020, the immense decrease reflecting Covid’s “substantial impact on the global asset management industry.” There’s no denying last year’s market chaos created waves: the FTSE 100 suffered its worst one-day drop since 1987 on March 12th, losing 10.9%, and the world’s three biggest fund managers saw US$ 2.8 trillion wiped off their AUM. Everything happened so quickly, the US market plummeting 34% in 33 calendar days, “three times as fast as the 1987 bear market” according to chief investment strategist Sam Stovall at research firm CFRA.
Remarkably, despite the economic turmoil and the restrictions implemented to protect health, worldwide AUM grew in 2020 and they’re expected to enjoy still greater increases this year. By 2024, Cerulli believes global industry assets will hit US$ 130 trillion, up from $90 trillion at the end of 2018. In the UK, despite being down on 2019’s 11.6% climb, consultancy EY estimates UK asset managers’ AUM rose 3.6% last year. It forecasts further growth of 7.1% in 2021 to £1.64 trillion, subject to effective global vaccine rollouts, relaxation of lockdown restrictions and a robust economic rebound.
A bounce back from such a momentous global slump is significant. However, it’s useful to make a distinction between the market’s race upwards and economic recovery more generally. Flourishing AUM are in stark contrast to an economy that’s been growing slowly due to challenges including unemployment, earnings deficits and reduced production. Despite these obstacles, however, household balance sheets in the UK look set to emerge from the pandemic in a strong position. The household saving ratio is expected to have averaged 17.5% last year, exceeding the previous peak of 14.3% in 1993, adding £150 billion to bank deposits between January and December 2020. Over a fifth of British people have seen their investment capacity increase due to Covid.
With more spending power but fewer occasions to exercise it in a world of uncertainty and sweeping change, people have been forced to reconsider not only their personal priorities and values but also to reassess where they put their money and the qualities they look for in prospective opportunities. Typically, when the market experiences upheaval, people are drawn to stability. They look for defensive investments in utilities, consumer staples and telecoms. The pandemic reframed our understanding of caution; in the words of Tobias Levkovich, Chief US equity strategist at Citigroup, “the ‘defensive’ in the Covid world became who could grow in an economy where there is no growth.” Sectors like e-commerce and tech.
The pandemic’s perfect storm also accelerated many trends already underway and sent them hurtling. It highlighted numerous structural fragilities and systemic imbalances, focusing our attention on how businesses operate and their relationship with employees, suppliers, communities and customers. The goalposts for corporate success shifted, investors realising that businesses which support a sustainable future are likely to be more robust. Although ESG as a theme has been building momentum over the last few years, it became clear that investments which take ESG factors into account are likely to perform well, especially in drawdowns, being less precarious if they take fewer ESG risks.
Data from exchange traded fund (ETF) analysis platform TrackInsight shows ESG ETFs recorded AUM of US$189 billion at the end of 2020. A new high, this represents an incredible growth rate of 223%. Over 33% of UK investors believe ethical investments are the key to addressing climate issues and helping to avoid future pandemics. The Investment Association claims responsible investment has emerged from Covid as the “standout opportunity”, last April seeing record inflows of almost £1 billion into responsible investment funds. While the economic and social aftershocks of the pandemic will take time to fully materialise, it is inconceivable that a situation so dramatic and so global will not make a lasting impact on the fundamental aspects of our lives. How we invest is one of these key areas.