Asset managers fret over lost gains as investor cash piles up on sidelines

Top asset managers are struggling with investor reluctance to embrace risk and put money into the markets, as interest rates and yields on cash savings remain at their highest level in more than a decade.

Investors have been stubbornly sitting in cash, hurting bottom lines for asset managers and forgoing gains on more than $1.5tn during a record bull run that until recently pushed markets to all time highs.

Several factors are driving the caution. Risk-free yields are outpacing inflation for the first time in decades. A narrow stock market riding high on a handful of volatile tech stocks, widespread geopolitical conflict, poor economic sentiment and an uncertain US election are all keeping investors firmly on the sidelines.

Asset managers, who have been frustrated with what they’ve called “tremendous” amounts of investor capital in cash for more than a year, are eager for rate cuts to ease pressure on their bottom lines. 

More than $6.1tn is held in US money market funds where investors can earn about 5 per cent on their cash with little risk, according to the Investment Company Institute, up from roughly $4.5tn before the US Federal Reserve began to raise interest rates.

It is estimated that investors have missed out on $225bn in stock market gains on $1.5tn in so-called excess cash as markets charged ahead this year. The S&P 500 is up more than 15 per cent since the start of the year. That cash earned roughly $75bn sitting in money market funds over the same period.

“Five per cent yields in cash have kept many investors overweight in cash . . . [but] those waiting in cash would have missed out on a broad stock market returns of over 26 per cent over the past year, including 17 per cent so far in 2024,” Larry Fink, the chair and chief executive of $10.6tn asset manager BlackRock, said following his firm’s earnings in July.

Investor reluctance to put cash to work has tested asset managers, who rely on management fees for invested capital and are in constant competition for assets. The excess in uninvested savings potentially translates to billions in lost fee income for the asset management industry.
While rate cuts are predicted later this year, they are also expected to remain attractively high to investors for some time.

The fees managers charge for money market funds are also much lower than their other investment products. “If the only thing that is inflowing is your lowest fee product suite then that’s suboptimal,” said Brennan Hawken, an analyst at UBS.

The reticence has confounded managers, who thought the broad rebound in markets (until recent weeks) would bring investors back into their funds, helping improve what have been modest flows across the sector. But despite markets hitting all time highs this year, investor’s risk appetite remains muted.

“Investor behaviour is still unusual,” said Andrew Schlossberg, the chief executive of the $1.7tn asset manager Invesco. Investors on the platform are still sitting with between 15 to 20 per cent of their assets in cash, he said. “Investors are waiting for the US Fed to give them clarity, so they’re sitting on sidelines.”

Investor reluctance has been amplified by broader uncertainty about how markets will be fare this year. “There’s some hesitation when will fed cut rates, uncertainty around geopolitics and then the US election, so you haven’t seen people come back from the sidelines in a meaningful way,” said Rob Sharps, chief executive of $1.5tn manager T Rowe Price.

Part of investor reticence is because the gains in markets have been led by only a handful of volatile mega cap tech companies. Just 7 stocks make up more than 31 per cent of the S&P 500 by market capitalisation. “The narrowness in the markets was worse than the 2000 tech bubble,” Schlossberg said.

The narrowness in the market has hurt active managers hoping to attract investors, because a rally in a highly concentrated number of stocks has made it difficult for diversified funds to outperform benchmarks.

As much as $300bn had flowed into the asset management industry in the first six months of this year, up from approximately $50bn over the same period last year, according to Goldman Sachs. “It’s not amazing, but it’s way better than 2022 and 2023,” said Alex Blostein, an analyst at Goldman Sachs, noting that higher rates “lasted longer than expected”.

Frustrated companies hope a Fed rate cut will drive investors out of cash and back into the market.

“As we get closer to the Fed’s rate cutting cycle, we expect traditional fixed income sectors to regain their place as the primary source of yield as cash begins to look less attractive,” said Jenny Johnson, the chief executive of Franklin Templeton, a $1.6tn asset manager.