the hidden face of a global giant

Analyse

The asset management industry is thriving, but its growing concentration is worrying. Between the domination of giants like BlackRock and systemic risks for financial stability, the stakes are high. Deciphering a questioning development.

Daniel Zulauf / ch media

Since August, the French insurance group Axa and the major bank BNP Paribas have officially studied the possibility to merge their asset management activities. For its part, the European leader Amundi (France) and Allianz Global Investors, the asset management arm of the Munich insurance giant, have also initiated discussions in recent months, before temporarily interrupting them.

Other rumors are circulating: according to recent press articles, the Italian insurance giant Generali is considering a merger with Natixis, the fund management subsidiary of the French banking group BPCE. As for Zurich, the Swiss insurer would undoubtedly have been active in this market of financial “marriages” if it had not sold its asset manager Scudder, 22 years ago, when it was going through an existential crisis .

Consolidation dictated by an implacable economic logic

Waves of consolidation have regularly shaken the global asset management industry for several years. This process of concentration obeys forces which relate to an economic logic that is almost frightening in its inevitability.

Since the 1970s, when the Bretton Woods monetary system ended and financial market liberalization began, returns on financial assets relative to economic output have increased sharply in most industrialized countries. Growth such that, even in our regions, the question of wealth redistribution has once again become a central subject in economics.

High returns on financial markets have certainly contributed to widening the gap between rich and poor in Western countries. But they also boosted the savings of households across all social classes, spurring a boom in the asset management industry that is now fueling its own consolidation.

An aging industry

In Switzerland, where the federal law on occupational pensions has applied since 1985 to all employees above a certain income threshold, compulsory retirement savings reached the colossal sum of 1,200 billion Swiss francs by the end of 2023, i.e. growth by 160% since the start of the millennium. Even the strong Swiss economic growth – which has enabled GDP to double in 23 years to reach more than 800 billion francs – appears modest in comparison.

And this trend is expected to continue. After a slight decline in 2022 due to the global rise in interest rates, assets managed by managers around the world rebounded the following year, increasing by 12% to reach almost 120,000 billion dollars. This revival gives the industry an almost youthful dynamism.

In reality, this industry is aging. It already exhibits classic symptoms of mature sectors: increasing pricing pressure reduces the impact of volume on profit growth, while competition forces colossal investments, which erodes margins.

As always, it is the middle segment that suffers the most. In asset management, this concerns active managers positioned in the middle of the risk-return curve, such as UBS with its large portfolio of investment funds. According to unofficial statistics published by TAI, UBS ranks tenth among the world's largest institutional managers, with $1.9 trillion in assets under management at the end of 2023.

To the left of the risk-return curve, we find ETF (index fund) providers like BlackRock and Vanguard, which offer inexpensive products suitable for the general public. On the far right, specialist managers market more expensive alternative investments with high potential returns, such as Swiss firm Partners Group.

The rise of ETFs and alternative investments

According to a recent study by Boston Consulting Group (BCG), the share of passive investments increased from 10% in 2005 to 20% of global volume in 2023. These products follow benchmark indices without taking particular strategic initiatives.

At the same time, alternative investments have seen spectacular growth. Bringing together private assets (like those offered by Partners Group), hedge funds and other vehicles resistant to traditional financial cycles, they already represent 20% of global assets under management, but above all 57% of the sector's revenues.

This specialization highlights a reality: the natural competitive advantages of insurers (large volumes of capital) or banks (distribution networks) are no longer sufficient to remain competitive in global asset management.

Risk for the stability of financial markets

The rise of giants like BlackRock (world leader in ETFs) and Blackstone (specialized in private equity) perfectly illustrates this process of concentration. But this development cannot be left to antitrust authorities alone, as in other industries.

The concentration of the sector poses a major danger: the stability of financial markets. Remember that monetary funds played an accelerating role during the last financial crisis. Unlike the 1930s, when savers themselves rushed to bank counters, in 2007 it was asset managers who acted, on behalf of savers.

The Credit Suisse crisis between fall 2022 and spring 2023 demonstrated this again: If large asset managers withdraw their funds simultaneously, deposit guarantee schemes instantly lose their value. Central banks, forced to take on the role of “lenders of last resort”, find themselves exposed to increasing risks, as we saw during this crisis. This is the dark side of the asset management industry, a reality we should examine much more closely.

Translated and adapted from German by Léa Krejci