New research by independent economic consultants Oxera is the first definitive analysis of the asset management industry’s impact on the UK economy since the decline of bank financing that began in 2008*.
It also emphasises the part that asset managers played in funding British business through 2009 during the worst of the financial crisis.
In relation to the debate on long term investment, the report claims that asset managers hold UK equities for around six years on average, based on analysis which adds compelling new evidence to the debate about holding periods and the roles of different types of investor in the UK market.
Moreover, the report highlights the substantial economies of scale that can be achieved through the collectivisation of individual savings, allowing investors access to diversified source of long-term returns across different asset classes, both in the UK and internationally.
It quantifies for the first time the value of these collectivisation services offered in the UK retail funds market, finding that for a £10,000 investment it can cost 7 times more to build a DIY portfolio of shares rather than buying a fund**.
Commenting on the report, Dr Luis Correia da Silva, Partner at Oxera, said:
“Much of the academic and public debate about asset management has focused on the size of the industry, in terms of gross value added or number of employees, or its performance relative to the market average.
“Our report aims to provide an additional perspective, by considering how the activities of professional asset managers contribute both to the efficient allocation of capital and to the efficient pooling of savings on behalf of savers and investors. In particular, we have looked at the role that asset management plays in channelling new capital to public and private companies.
“This role of asset management is particularly important during periods when bank lending has been reduced, creating a funding gap. Much of that gap has been filled by direct lending and equity investment by asset managers. Based on data collected for this study, it is estimated that the new funds channelled to businesses by asset managers were equivalent to around a third of the value of total UK business investment in 2014.”
Jonathan Lipkin, Director of Public Policy at the Investment Association, said:
“The lifeblood of any economy is the ability to source and raise capital to support companies and other activity such as housing and infrastructure. The Oxera report brings a new perspective and new evidence on the role of the investment management industry in this process. Oxera quantify the scale of funding and highlight how long-term relationships with companies can help to facilitate tangible support, particularly at times of crisis.
“The report also contributes significantly to the debate on holding periods, using an innovative methodology which shows that average holding periods are much longer than commonly supposed”
“As the UK considers its future outside the European Union, the role of financial services – and investment management – needs to be seen both through the optic of its core domestic purpose and its export contribution. In reality, the two are closely linked. Serving clients and companies successfully in the UK allows us also to develop the skill and product sets that have been so successful internationally.”
* The report estimates that UK asset managers were responsible for funding 64.6% of new bond issuance in 2013 and 2014, providing £102bn of the total £158bn raised during the period. It also estimates that asset managers funded 39.6% of Initial Public Offerings of shares on the stockmarket in the period, providing £7.6bn of the £19.2bn raised. Finally, asset managers funded 41.2% of further share issues, providing £9.1bn of the £22.1bn of funds raised. Overall, asset managers provided £119bn of the £200bn raised on capital markets in the period, equating to 60% of all financing.
** The impact of the cost of accessing markets is compared between a theoretical self-invested portfolio of 50 or 100 equities and a typical fund in the IA UK All Companies to ask whether a collective fund structure delivers better economies to investors. For a £10,000 investment, the fund structure would cost £468 over five years compared to a theoretical cost of £1,873 for a DIY portfolio of 50 shares and a cost of £3,250 for a DIY portfolio of 100 shares. For a £5,000 investment an average fund would cost £234 over five years versus a cost of £3,215 for a DIY portfolio of 100 shares, meaning it would cost more than 13 times as much to invest outside of a collective structure. Collective structures add additional value above cost savings in terms of diversification benefits, greater expertise and others.
The Investment Association article is here.
The FT article is here.
Download the full report.