2024 Asset Management Industry Trends to Know

As the financial landscape continues to evolve, so do the challenges and opportunities for the asset managers. The US equity markets were up nearly 30% year over year in August 2024, lifting asset manager valuations closer to our fair value estimates. While the traditional asset managers are still facing secular headwinds, fundraising gains and expected interest rate cuts are driving alternative asset management stock gains.

When you’re up to date on the latest Q3 2024 asset management industry trends, it can improve your ability to financially empower clients and help them reach their goals. Our Morningstar researchers take an in-depth look at the traditional and alternative asset management spaces, the impact of private and public markets, top industry picks, and more.

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Secular headwinds persist even as cyclical headwinds are abating.

The US equity markets have waxed and waned with the expected direction and magnitude of potential reduction or hikes in short-term interest rates since the start of 2022, and we're nowhere near the end of that cycle. While we were cautious about US stock returns coming into 2024, the US equity markets were still up 17% year to date in August of this year.

We expect the first federal-funds rate cut to come in September 2024, which we believe has already been priced into the equity markets. Meanwhile, the yield curve remains inverted, meaning that the market is already baking in substantial monetary policy easing over the next several years.

Having risen during much of 2020-21, share prices for the traditional asset managers sold off hard during 2022 (as both the credit and equity markets declined double digits). The rally in the US equity markets over the past year has lifted their fortunes, but not enough to recoup what was lost during 2022-23. Even so, most of the traditional asset managers we cover are trading at only slight discounts to our fair value estimates.

On top of that, revenue growth will not fully recover for these managers until their level of managed assets recover beyond pre-2022 levels—which in most cases won't happen until late 2024 or early 2025. Ongoing fee compression also provides an additional drag on top-line growth and has a dampening effect on profit margins, given the operating leverage that is inherent in these firms' business models.

While the traditional asset managers we cover have not seen management fees decline as dramatically as the rest of the industry during much of the past decade, average asset-weighted expense ratios for the industry have started to decline at a slower rate than they had been. All the while, fees continued to come down for our coverage around the same pace they have been the past several years. As such, we’re currently witnessing higher rates of decline in the realization rates of the managers in our coverage than we are for the industry.

Invesco, Franklin Resources, Federated Hermes, and AMG have all seen their base management fees decline more than the group average, as well as actively managed funds overall, the past several quarters.

Lower rates and improved market conditions are a net positive for alternatives.

Almost all alternative fund performance took off after the pandemic due to a combination of strong equity market returns and a huge fundraising and deployment cycle. While fund returns pulled back during 2022-23, the use of a mark-to-model valuation approach by the traditional asset managers helped smooth returns somewhat for private-market segments during these more volatile markets.

Coming into 2024, we had expected a continuation of positive results but the past couple of quarters have been more of a mixed bag. It should also be noted that the historical outperformance of alternative funds relative to traditional offerings has not always translated into above-average stock performance. We’d highlight the hit that the shares of these companies took during the 2022 selloff, along with the rally in the shares over the past year, as an indication of how highly correlated these stocks can be to market returns.

Private equity remains the largest alternative-asset category and continues to lead fundraising efforts in terms of capital raised at the strategy level, accounting for 56% of total fundraising on average the past five years.

While 2023 fell short of being another record year of fundraising for the private capital markets, there was a meaningful uptick in the back half of the year. And based on results from the first half of 2024, we expect fundraising this year to not only surpass 2023 levels but quite likely 2022 levels (with that year's $1.5 trillion in capital raised being the second-highest annual haul ever behind the $1.7 trillion raised during 2021).

With deployments slowing, the private equity segment closed out June 2024 with an estimated $7.2 trillion in fee-earning AUM and $2.3 trillion in dry powder (compared with $6.6 trillion and $2.3 trillion at the end of 2023).

Much like we've seen with fundraising, the five largest publicly traded alternative-asset managers have increased their share of both total capital invested and dry powder since the pandemic. At the end of June 2024, these firms—Blackstone, Apollo Global Management, KKR, Carlyle Group, and Ares Management—accounted for 21% of total capital invested, as well as the industry's dry powder, due to their large fundraising hauls in 2019-22.

In a constantly changing asset management industry, it’s important for asset managers to stay ahead and demonstrate their value. When you know the latest trends, you can better support your clients.

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