Aug 9, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

Thanks to everyone who sent food and drink suggestions. I have so many places I will now need to eat and drink.

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Situational awareness:

  • The U.K. economy shrank in the second quarter — for the first time since 2012 — amid uncertainties surrounding Brexit. (AP)
  • As it rolls out the Apple Card, Goldman Sachs is accepting some applicants with subprime credit scores. (CNBC)
  • Uber's stock price dropped by more than 12% after hours yesterday after Q2 revenue and losses missed analyst expectations. (Axios)
1 big thing: Asset management is being disrupted

Illustration: Aïda Amer/Axios

New technology is reshaping asset management for a new generation of workers, and most of the industry has not kept pace.

Asset managers are in danger of being left in the cold as individual investors are forced to take control of their retirement savings, and more money shifts to passive strategies.

  • "The change is accelerating with tech and data and analytics in the asset management space, and companies need to really hurry up and get their house in order before they start being disrupted," Boston Consulting Group partner and managing director Lubasha Heredia tells Axios.

By the numbers: The value of assets under management (AUM) fell by 4% globally in 2018, to $74.3 trillion from $77.3 trillion, the first significant year-over-year decline since 2008, according to BCG's 2019 global asset management report.

  • North America saw the biggest decline, with managers recording $2 trillion of outflows over the course of the year, accounting for two-thirds of the global loss in value.
  • Total assets under management declined in almost all regions, largely because of the global market selloff during the fourth quarter.

Active management fared particularly poorly, losing $1 trillion in AUM last year, continuing a long-term secular trend.

  • Over the past 15 years, actively managed assets have declined significantly in popularity, BCG's data shows.
  • They now account for just $1 out of every $3 of assets managed, versus more than $1 out of every $2 of AUM in 2003.

Between the lines: As people move their money out of actively managed funds, they are being drawn to products that offer high-tech options that provide many of the same services as traditional financial advisers but at a fraction of the cost.

  • Many small and mid-sized asset managers are simply unable to compete and are being "squeezed out" of business, Heredia says.
  • That's creating a space where only very small niche players and massive asset management conglomerates like Vanguard and BlackRock can survive.
  • Heredia is also expecting digital giants like Google and Amazon to move into the space, as Alibaba's Alipay has done in China.

What to watch: China is expected to become the second-largest region for asset management — ahead of continental Europe — and will attract more flows than the U.S. over the next decade, BCG's data shows.

  • The firm also expects that sustainable investing will rise as firms weave environmental, social, and governance factors into their investment decisions, aiming to create positive impact without undermining returns.
Bonus: The rise of alternatives
Expand chart
Adapted from Boston Consulting Group; Chart: Axios Visuals

The asset management industry also is undergoing a seismic shift away from traditional active management and towards alternative products, mainly private equity. Boston Consulting Group predicts that by 2023, alternatives will generate almost half of the industry's revenues.

  • In 2003, traditional active management strategies generated about 40% of the asset management industry's revenues and was home to 51% of all assets managed. By 2023, BCG predicts that share will have dropped to 17% of revenues and 27% of total AUM.

The intrigue: Because private equity and other alternative assets are less liquid than traditional bonds or equities and carry higher barriers to entry, asset managers can continue to charge much higher fees, BCG managing director Lubasha Heredia says.

  • Last year, even though just 16% of assets under management were in alternatives, the asset class generated 45% of the industry's revenues.
2. Farmers offset tough times with side gigs

Illustration: Rebecca Zisser/Axios

Axios' Courtenay Brown writes: China’s vow to stop buying U.S. agricultural goods comes at a dire time for farmers, who have been cutting costs and picking up side-hustles — like hosting pizza nights for agri-tourists — to make ends meet.

Why it matters: Adverse weather conditions, slumping commodity prices and trade wars are threatening farmers' already-dwindling incomes, in the midst of the worst economic downturn for the sector since the 1980s.

  • “China’s announcement that it will not buy any agricultural products from the United States is a body blow to thousands of farmers and ranchers who are already struggling to get by," Zippy Duvall, head of the American Farm Bureau Federation, said in a statement.

What they’re doing: Enter agritourism, which gives paying visitors a look inside farm life — and farmers an extra way to make money. 

  • Tourist entertainments include traditional corn mazes, fruit and vegetable picking, goat yoga, and pizza nights on the farm — with toppings drawn from the freshest of ingredients.
  • Some farms are opening their doors to Airbnb guests, who get to rub elbows with cows, chickens and even llamas.
  • Taylor Huffman, a 3rd generation farmer who runs Lawyer's Winterbrook Farm in Maryland, says half her income now comes from the range of activities the farm offers, which include pumpkin-picking, Ziplining and a petting zoo. “Hands down we would not be able to pay our bills without it,” Huffman tells Axios.

Some farmers are also looking to cash in on hemp, which is used to make CBD oil, the trendy "wellness" product. The crop’s federal legalization last year opened the doors for farmers to profit from the booming industry — but regulations are still murky.

  • States like New York and Ohio let farmers grow hemp for commercial use.
  • “The level of interest [in hemp] I get is an exact reflection of the farm economy,” Todd Van Hoose, CEO of the Farm Credit Council, tells Axios. “People are desperately trying to figure out, is there something else they can do to make a little money out here?”

The bottom line: Agritourism and other side-hustles may stem the pain but aren't likely to make up for losses from slumping exports and too much rain.

  • The Trump administration has sought to compensate farmers with bailouts — though half of the dollars of the federal aid went to the biggest and richest farms, one study found.
3. The other Amazons

Out for delivery. Photo: Issouf Sanogo/AFP/Getty Images

"Amazon but for X country" is increasingly on the horizon, but cash payments are holding them back, Axios' Erica Pandey reports.

  • Why it matters: Because China leapfrogged credit cards and went straight from cash to mobile payments, e-commerce has boomed there. It accounts for 30% of all retail, compared to the 10% in the U.S.

The big picture: Serving populations that tend to rely on cash and live in harder-to-reach areas, the online retailers of the developing world are searching for creative ways to grow — and keep the international giants at bay.

  • By 2020, the global e-commerce market is projected to hit $4.2 trillion, double its size in 2016, according to eMarketer.
  • Asia's market, led by India, is expected to grow 25% this year.
  • Latin America: 21%.
  • Middle East and Africa: 21%.

Between the lines:

  • In Africa, Jumia is dealing with homes that lack traditional addresses: "[I]f you say in a city in Africa, 'I live in the third street by the church with the blue door,' that’s the address," Jumia co-founder Sacha Poignonnec said in an interview with McKinsey.
  • In Russia, Amazon equivalent Ozon deals with 40% of Russian e-commerce orders still paid for in cash upon delivery and another 20% paid with cards upon delivery.
  • And in India, cash is still king, but giants like Amazon, Walmart and Alibaba are making massive investments in homegrown firms like Flipkart and Reliance Retail.

The bottom line: The developing world lags. But it's catching up.

Dion Rabouin