BlackRock Inc. (BLK) and Vanguard, the two largest asset managers, are poised to become even more dominant in 2019 after attracting a record share of investor's money in 2018, per Business Insider. BlackRock, the leading money manager, is expected to attract nearly $100 billion in new money in 2019 alone for iShares, the firm’s prominent exchange-traded fund platform. In just five years, the $1.4 trillion company has managed to double its assets under management, per Morningstar figures. Meanwhile, Vanguard is in close second, ending 2017 with $4.9 trillion total assets under management, posting stellar gains across mutual funds and ETFs and growing its platform almost 100% since 2013. 

Index-Investing Booms

While a surge in market uncertainty plagued the decade-running bull market last year, dragging the S&P 500 index to post its worst performance since 2008, the two investment giants thrived. Asset managers at large have benefited from a spike in interest for passive strategies over active strategies, which saw $398 billion in inflows and $156 billion in outflows respectively last year. Individual investors seeking safer, less expensive, and often superior-performing strategies in a period of heightened volatility have driven the trend. According to data from Morningstar, while both categories lost money last year, active funds actually outperformed passive funds through Nov. 30, paring losses at 1.7% versus 3.2%. By comparison, the S&P 500 posted a 5.1% gain over that same period. 

Meanwhile, the largest asset managers are beneficiaries of consolidation in the industry, wherein the top 20 managers oversee 43% of assets, according to an October report from advisory firm Willis Towers Watson. BlackRock brought in a record $25.3 billion to its passive products last month, double that of Vanguard, which dominates the mutual-fund industry with inflows of $75 billion in 2018.  

"The asset management industry is facing a period of massive change and disruption resulting from the confluence of several global megatrends: technological, demographic, economic, environmental and social," read the recent study. "The successful asset management firms over the next few years won't dodge these industry realities." 

At a conference earlier this month, BlackRock Chief Financial Officer Gary Sheldin attributed the rapid expansion of the index-investing industry, with ETFs at the center of that growth, to the “migration from commission-based to fee-based wealth management, clients' focus on value for money, the use of ETFs as alpha tools, and the growth of all-to-all trading in fixed income.” 

Behemoths Create Losers

While Vanguard and BlackRock pulled off a stellar year, shares of the majority of listed asset managers took a tumble in 2018 – and the prospects for a recovery in the new year look bleak, per The Wall Street Journal.

As global markets suffered a series of downdrafts starting last January, investors became more defensive, pulling their money in great numbers out of funds in the third quarter. Continued uncertainty regarding slowing global growth and geopolitical instability will likely continue to take a toll on these businesses, as asset prices decline and translate smaller profits for firms.

The biggest losers, squeezed by cheap index managers with solid performance on one side, and expensive alternative managers who claim higher returns from being properly active owners of often illiquid investments on the other, have been the old-fashioned active managers. 

This “squeezed middle” has been pressured to cut fees as assets shrivel, taking a painful bite out of revenues. Active managers’ share of global industry revenues fell from 64% in 2003, to just 41% by the end of 2017, according to Boston Consulting Group. Over the same period, share of active investors’ assets under management shrank from 76% to 52%. In 2020, BCG forecasts the group’s share of revenues at 36% and share of assets at 45%.

Regulatory changes have also posed as a negative headwind to these funds, as reforms in the U.S. and Europe have required more transparency on financial-services fees.

Looking Ahead

It’s important to note that a bear market could hammer the profits of both BlackRock and Vanguard, though the down market may also serve as a great opportunity for the two companies to continue crushing smaller rivals, growing even faster when a new bull market or economic recovery occurs. As for the broader shake out off listed asset managers, which suffered a 25% decline in 2018 versus the S&P 500’s 7% loss, companies are likely to seek out M&A to boost scale and ramp cost savings initiatives.