Asset managers suffer as oil funds withdraw cash
Madison Marriage and Chris Newlands
Global asset managers are facing a double hit to their fees, as sovereign wealth funds withdraw billions to support their oil-dependent economies — and switch to a cheaper in-house investment approach.
A collapse in the price of oil since June 2014 is taking its toll on the investment management industry, as oil-producing countries pull money from their wealth funds to make up for a loss of export earnings. Of the world’s 50 sovereign wealth funds, which collectively oversee about $6.5tn, one-third have reported a reduction in their invested assets. Of those affected, half derive their capital from oil, according to data provider Preqin.
So far this year, the Saudi Arabian Monetary Agency — the world’s third-largest sovereign fund with $661bn invested — has withdrawn about $70bn from external asset managers. One manager likened the outflow of funds to a stock market crash — calling it “our Black Monday”.
But, now, this loss of business is being exacerbated by sovereign wealth funds’ desire to cut the cost of investing — and cut ties with third-party managers. Some believe they can do a better job of managing their money themselves, at a fraction of the price.
Azerbaijan’s oil fund, which oversees $37bn of assets, has said in its annual report that it intends to bring the management of all of its assets in-house. It currently has $662m managed by State Street, the US financial services group, and $664m with Swiss bank UBS.
Similarly, the Abu Dhabi Investment Authority — the second-largest sovereign fund globally with $773bn of assets — has also grown its in-house teams. It reduced its allocations to investment managers from 75 per cent to 65 per cent last year — in effect, a $77bn outflow from external fund houses.
A spokesperson for one large sovereign wealth fund, who did not want to be named, said: “We have been building our in-house capabilities for a number of years. This has been happening across all asset classes.”
According to a new report from Moody’s, the rating agency, the damage to asset managers’ revenues will be lasting.
“Our view is that if the oil price stays where it is, these [oil-rich] funds will continue to take reserves back,” says Rory Callagy, vice-president of investor services at Moody’s. “We don’t foresee material increases in oil prices over the next several quarters. Longer term, that’s a trend we view to be negative for the [asset management] sector.”
Moody’s also warns that sovereign wealth funds taking money in-house represents a long-term trend — and, those that still use external managers are “being more aggressive about negotiating prices”.
Gary Smith, head of sovereign wealth funds at Barings, the UK asset manager, agrees. “Most [sovereign] funds have a long-term plan to take the management of their money in-house,” he says. “They hire asset managers to learn about products and the end destination is to [run money] internally.”
A recent report by Deutsche Bank on sovereign wealth funds concludes that this trend is likely to dent management fees. “This may pose a big challenge to the asset management industry,” the authors warn.
Amin Rajan, chief executive of Create Research, the asset management consultancy, says: “Large asset managers will be hit the most, since sovereign wealth funds tend to prefer well-known brands. They will suffer a double whammy: loss of fees and falling asset values.”
State Street has already been badly affected. It suffered $65bn of outflows in the second quarter of the year, which it blamed partly on clients’ need for cash “due to lower commodity prices”.
BlackRock also appears to have been hurt by withdrawals. It reported a net outflow of $24bn from Europe, the Middle East and Africa in the second quarter — which market participants partly attributed to redemptions from sovereign wealth funds in the Gulf.
After BlackRock’s results earlier this month, one analyst asked for clarity on “how diversified BlackRock’s exposure is between commodity-related sovereign wealth funds and non-commodity related funds”. In reply, BlackRock president Robert Kapito said: “That’s a great question and it is a question I’m not going to answer because I don’t talk about my clients.”
Most fund management companies are similarly reluctant to discuss withdrawals by sovereign wealth funds. Invesco, Baillie Gifford, Investec and Aberdeen, as well as BlackRock, all decline to comment.
Asset management arms at JPMorgan, Deutsche Bank and UBS also prefer not to discuss the issue. One fund group would say only that sovereign wealth fund outflows “hit a little close to home for us”.
Equally, the oil-rich sovereign funds of Norway, Abu Dhabi, Qatar, Nigeria, Kuwait and Saudi Arabia declined to comment.
Of the few asset managers willing to speak, the message is one of reassurance. Gavin Ralston, head of official institutions at Schroders, Europe’s largest listed fund house, says his company has not witnessed “any oil-related withdrawals of assets managed for sovereign wealth funds”.
Mr Smith also denies that Barings has experienced outflows from sovereign wealth clients. He does concede, however, that there has been “a slowdown in new activity” from sovereign wealth fund investors. |
