I. Sector landscape and outlook

The UK investment management industry plays a significant role in the economy, helping millions of individuals and families achieve their life goals by growing their investments. Around 75% of UK households use investment manager’s services. The industry invests billions of pounds in companies and in the financing of transport networks, hospitals, schools, and housing projects. The industry supports 115,000 jobs in the UK, including over 14,000 in Scotland. The Asset Management Industry in the UK is one of the most prolific and thriving Financial Services Industry.

Industry Size

According to the Investment Association (IA), UK; total assets under management (retail and institutional) stood at £7.7 trillion (€8.8 trillion) at the end of 2019. According to the IA estimates, these numbers are likely to be doubled in the next ten years. UK-based asset managers are determined to grow their influence on the global stage despite the challenges posed by Brexit. The IA said it had set an “ambitious” target of £15 trillion assets under management for its members, which include UK-headquartered companies as well as overseas asset managers with a UK presence.

Fig 1. UK Investment Management Industry 


Source: Investment Association (UK)
 
Key Industry Statistics (Retail and Private Clients) 

At the end of May 2020, total funds under management with the UK investment management companies stood at £1,23 billion. About 56% of the total fund under management were deployed in the equity asset class at the end of May 2020, increased by 0.40bps on a M-o-M basis and narrowed by 100bps on a YoY basis, respectively.

Fig 2: Funds under management – Last thirteen months (in billion) 


Source: Investment Association (UK)

AUM hit by massive outflows in March driven by COVID-19: Retail funds experienced record net outflows of £10 billion in March 2020 as investors panicked owing to COVID-19 pandemic. Fixed Income funds were the worst hit asset class in March with £7.4 billion in net retail outflows. However, UK equity funds returned to inflows, with net retail sales of £747 million in March, while all other equity regions experienced outflows. Short Term Money Market was the best performing asset class in March in terms of flows, with net retail sales of £1.7 billion. Responsible investment funds also remained resilient in March, with £113 million in net retail sales.

Active Funds Lead as Retail flows Near £5 Billion in May 2020: In May 2020, net retail sales continued their recovery after a steep outflow in March 2020. About £4.7 billion net inflows came into retail funds in May 2020 building on the positive fund flows in April, according to latest figures published by the Investment Association (IA). The other key numbers are:
 

1. Active funds: Building on strong inflows in April, active funds ?were boosted by £3.5 billion in May, while tracker funds also benefited.

2. Bond funds saw net retail sales double from April, with £1.9 billion in May.

3. Responsible Investment fundssaw another month of strong net retail sale, attracting £911 million in May. Responsible investment funds sustained their strong momentum by pulling in close to a record £1 billion for a second month in a row.
 

By Assets class, fixed income recorded a net inflow of £1.9 billion of inflows, while equity funds witnessed an inflow of £1.6 billion. Money market fund also recorded an inflow of £579 million. Mixed assets fund and other funds recorded a combined inflow of £723 million. However, Property funds were the only asset class that experience net retail outflows in May of £21 million.
 
  Fig 3: Retail Flows – Last thirteen months (in million) 

Source: Investment Association (UK)

Fig 4: Funds Under Management and Net Sales (Retail and Private Client) 


Source: Investment Association (UK)

Key Trends

MiFID II: As post-GFC regulatory legislation in the US, the Dodd-Frank Act restructured the compliance environment for that nation’s financial services industry; MiFID II would have a widespread effect on the regulatory framework for the European wealth and asset management industry. As Europe is the world’s second-largest market in terms of assets under management (AUM), MiFID II would affect most global firms, particularly in how they distribute products, incentivize their client-facing advisors, and communicate’ and interact with clients.

Increased Merger & Acquisition Activity: Growth through traditional organic strategies, such as increased, spending on marketing, advertising, enhancing the product suite and hiring is costly and can take time to deliver tangible results. Shareholders of publicly traded firms tend to prefer to see results sooner rather than later. Further, valuation premiums of many asset management firms, particularly those that are small to midsize, are becoming highly attractive. Consequently, strategic M&A activities are likely to rise significantly, driven by the desire for asset management firms to rapidly grow their business.

Active to Passive Shift: The ETF market continues to show strong signs of growth, and many asset managers are starting to recognize ETFs as an important part of the digital product offering. More and more people are moving to ETFs as outperformance by active fund managers’ is not significant and buying ETF is cheaper than any active fund. Management fee of the ETFs are significantly lower than the active funds as ETF generally tracks a specific index and active management of AuM is not required.

Emergence of Robo Advisory: Artificial intelligence is disrupting the many industries, and investment management is not an exception. One of the hottest trends to emerge in this area is the use of robo-advisors. These are software programs that use the data supplied by clients to create and automatically manage their investment portfolios. AI can help people in save and invest better by using improved datasets and algorithms to deliver solutions tailored to their needs efficiently. Robo-advisors are online services that use algorithms to automatically perform many investment tasks done by a human financial advisor. Initially offered by startups, these are now part of the suite of services offered by major financial institutions such as Vanguard, Schwab and Fidelity.

Key Risks 

The COVID-19 pandemic is bringing the world into uncharted waters. In the short-term, the UK Asset management industry is likely to remain under pressure due to increased market volatility in both equity and fixed-income securities. Further margin squeeze, an ever-increasing regulatory burden, macro-economic and political change, such as Brexit, poses key challenges to the sector. The expectations of clients in this environment change quickly and place even greater pressure on the industry to respond to their evolving needs.

Outlook

The global macroeconomic outlook remains uncertain, and the experience of individual countries will vary considerably. The asset management industry across the world are witnessing heat from the market volatility and would continue to do so till the time a vaccine is not in place. After a steep plunge in the global equity markets which started in February 2020 and extended till March-end, globally market has reported a quick recovery, and many world indices are inching towards lifetime high as well, which is a positive development for the investment management industry. The flows and AuM are expected to increase in the near to medium term as the markets have begun to recover from the levels seen in March driven by fiscal and monetary stimulus combined with the easing of Covid-19 restrictions, which has led to an improvement in investors' risk appetite. The industry has seen steady growth in the last five years driven by growing retail participation. Due to increasing retail participation, the profitability of AMCs is likely to be healthy. Also, this industry has the potential to multifold its size from the current level. There is strong reason to believe that the UK investment management industry has not yet seen its peak.

II. Investment theme and stocks under discussion (ASHM, JUP, SDR and IPX)

After understanding the recent trends in the industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Price to Earnings.