North American asset managers surged through COVID pandemic

New McKinsey report highlights growing interest in fixed income, private markets amid updraft of U.S. markets

North American asset managers surged through COVID pandemic

While 2020 saw stock markets in North America decline by a sizeable 30%, asset managers were nonetheless able to turn in a record performance.

That’s according to a new report from McKinsey, which found the global asset management industry rose to an all-time high of US$114.7 trillion in AUM last year; in terms of AUM growth, that was the second-best year since the financial crisis. At the same time, net new flows of asset accelerated by 2.7%, slightly down from 2019.

“In North America, 2020 was a story of the updraft in the U.S. markets in particular, in large part because U.S. media, technology, and healthcare companies were overrepresented in the circle of winners of the global pandemic economy,” the report said.

AUM in North America advanced 13% in 2020, which included 2.3% in net new flows – comfortably above the average of the five years prior. Industry profits drew tantalizingly close to US$73 billion, though that was dampened as fee compression ticked up to 3% compared to 2% annually in recent history.

Asset class-wise, the report saw particular popularity in fixed income for both active and passive strategies. Net flows into fixed income reached US$257 billion in active funds and US$230 billion in passives. Notably, major institutional investors embraced fixed-income ETFs “as the resilience of these vehicles in the most volatile days of the pandemic helped to assuage prior investor concerns about liquidity.”

The report attributed the growing interest to several factors. An aging North American population has coaxed asset allocations naturally toward “more stable yield-oriented assets.” Beyond that, it suggested investors took on more fixed income as they sought to rebalance their portfolios and maintain their target asset allocations. Finally, it said active fixed-income managers have proven to be a reliable source of return as they consistently outperformed their benchmarks.

McKinsey also noted growing attention to private markets, with continued growth in demand for infrastructure, private equity, and private debt. Over half of investors expect to place more assets in infrastructure in 2021, the report said, compared to 38% in 2020, driven by a belief that “governments and society will seize the pandemic moment and make significant commitments to rebuild and renew.”

The sunny picture was marred by US$330 billion in assets being withdrawn from active equity funds as “fewer than half of active managers outperformed their benchmarks after fees.” That continues a trend of accelerating outflows from US$231 billion in 2018 and US$282 billion in 2019.

As the world navigates the post-pandemic world, McKinsey identified a handful of themes that will help set the new growth trajectory of the industry, including digitalization, policy changes, and ESG concerns.