Global markets hit an inflection point in 2022. A decade of relative calm following the global financial crisis—including two years of supernormal returns after the initial shock of the pandemic—gave way to a new reality of supply-side disruptions, geopolitical tensions, and surging inflationary pressures. These factors have triggered a fundamental reset of macroeconomic policy and a fading away of the familiar backdrop of rapidly globalizing trade and capital flows, lower-for-longer interest rates, expanding central-bank balance sheets, and accommodative fiscal policy (Exhibit 1).
As the persistent—and, some would argue, secular—nature of these shifts became apparent, asset owners and asset managers alike have recalibrated their assumptions about pricing risk across the investable universe. The reset button has been hit for nearly every major asset class. Equities retreated from their historical highs in late 2021, with the S&P 500 declining by 20.6 percent over the first six months of 2022, its worst performance since 1970. Fixed income, once a reliable ballast against market downturns, suffered a 10 percent decline in the same period in the face of inflationary pressures—by some accounts the worst half-year performance by bonds in over 200 years. The greatest reversals were inflicted on some of the ostensible winners of the pandemic era: the high-flying technology sector and emerging asset classes, with valuations of some prominent tech unicorns subject to drastic down rounds and cryptocurrency valuations more than halving as investors decided to “get real” with tangible cash flows and hard assets. Despite the recent bounce-back in asset prices over the early summer months, significant uncertainty remains.
This great reset of macro, market, and policy assumptions has had three major impacts on the North American asset management industry:
- After two years of record growth and profitability, the industry hit a speed bump in its near-term economic trajectory, and significant questions remain as to which elements of its slowdown will be part of a new normal.
- The industry’s clients—institutional and retail alike—are under pressure as they cope with reopened funding gaps and anemic asset class return forecasts, and they are questioning previously reliable recipes for portfolio construction and long-term investing (Exhibit 2).
- The Great Reset of 2022 has loosened some of the foundational assumptions behind several of the past decade’s defining trends, including the internationalization of products, clients, and capital sources; rapid growth of risk-on and leverage-oriented business models; and a wave of commoditization borne out of the surging demand for bulk beta—assumptions on which the North American asset management industry had built its growth trajectory.
What impact will the Great Reset have on the structure, performance, and prospects for the North American asset management industry? To answer the question, our full report, available for download below, begins by briefly taking stock of the industry’s starting position—its performance and health following two highly unusual pandemic-era years. We note that the experience of those years has created both opportunity and vulnerability. We then explore how the secular shifts of 2022 have affected the industry to date, as well as the impact they are likely to have on a set of familiar industry trends that have been playing out over the past decade. The early summer months brought a reprieve in the markets, but continued macroeconomic volatility creates new demands on asset managers for enhanced resilience and accelerated reinvention. In that spirit, we lay out an “all-weather” agenda for managers seeking to reposition themselves to thrive through the uncertainty of the years ahead.