16 January 2018

Retail Investors Branch Out, Drive Firms’ Growth

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Money managers have reported seeing increased inflows into multi-asset and alternative investments from non-institutional clients, and many believe this trend represents the beginning of a permanent shift.

While institutional investors are still betting on multi-asset and alternative investing strategies, the rate at which retail investors are doing so is growing faster.

Indeed, in terms of cash flow, multi-asset products and alternative assets continue to show significant growth that outpaces most other investment products, and the biggest source of such growth is from retail investors.

One reason is that retail investors are becoming more outcome-oriented, especially since the most recent financial crisis, and this evolving outlook has led them into multi-asset and alternative strategies.

Another factor though is simply that the success of institutional investment in multi-asset and alternatives has spilled over into retail, as asset managers have launched several new multi-asset and alternatives mutual funds in the past few years not only to accommodate but also fuel retail demand.

Of course, the growth in retail relative to institutional can seem a bit exaggerated, since many institutional investors already have multi-asset allocations, while such strategies are still new to a good many retail investors. Also, there are also more strategies — such as global macro, event-driven and arbitrage approaches — which compete for  investment dollars within this portion of institutional investors' portfolios.

Nonetheless, multi-asset is an area that's seen significant growth in absolute terms in the retail sector, as financial advisors have begun using these products more and more as a core component of their portfolio.

For example, BlackRock had retail long-term net inflows of $14 billion in the first quarter of this year, including $3.6 billion into multi-asset class strategies. For comparison, total net institutional inflows were $4.97 billion, including $1.3 billion into multi-asset strategies.

Looking back a bit more, BlackRock experienced net retail inflows of $16.59 billion and $8.34 billion during its fourth and third quarters of 2013, respectively, while it saw institutional net inflows of $4.8 billion in the fourth quarter of last year and net outflows of $3.31 billion in the third quarter. Total multi-asset inflows were $17.36 billion in the fourth quarter and $4.86 billion in the third.

Three years ago, however, BlackRock's $208 billion in multi-asset assets under management (AUM) — 5.7% of its total AUM as of March 31, 2011 — was driven primarily by institutional net inflows of $12.4 billion, while retail and high net worth clients added $2.5 billion.

At year-end 2011, institutional investors represented 63% of BlackRock's $225.2 billion multi-asset AUM, while retail and high net worth investors accounted for 37%.

Retail vs. institutional 

Executives at several other large money management firms were unable to break out how much of their multi-asset and alternatives net asset flows were from retail clients compared to institutional.

However, J.P. Morgan Chase's first-quarter earnings statement shows that $47 billion of its $72 billion in net inflows during the past 12 months at J.P. Morgan Asset Management went into multi-asset and alternatives strategies. Moreover, institutional assets under management did not change significantly on a year-over-year basis — $773 billion out of $1.65 trillion total AUM at March 31, up only 3% from the year-earlier period. Its retail and private banking assets, though, went up 26% and 11%, respectively.

The upshot of all of this is further evidence that not only multi-asset and alternative flows from non-institutional clients are growing not only within various individual companies but across the industry as a whole, and that such growth indeed represents a more general and more or less permanent evolution in terms of how retail investors and their advisors think about constructing portfolios.

At bottom, perhaps, is an increased desire for diversification while still pursuing ‘alpha’ – or market beating return on investment – strategies, which has led high-net-worth investors and family offices to seek out investment products geared to such strategies which also display relatively low correlation among results.

This has meant, and will likely continue to mean, greater demand for what were previously considered more “institutional-quality” assets, including alternatives and multi-assets.

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