Rebooting the global asset management industry

18 Rebooting the global asset management industry Theme 7: Reports of the Death of Alpha Remain Exaggerated As mega indexers – with capabilities across the entire waterfront of passive and active investing – remain ascendant, one question has come to the fore: how are the rest going to retain their relevance in the land of giants? Some – especially public market players – have expanded their footprint in private markets with better growth potential. But the rest of our survey respondents believe that it is not a credible option for them, in view of the big consolidation now in progress in private markets. Also, their opportunity set is limited on account of the current all-time-high level of dry powder: capital allocated but not invested, waiting for an opportunity. Private markets will still likely remain a good diversification play, as juicy returns are diluted with the new wall of money. Attractive returns until 2022 relied on a unique mix of the unusually low cost of leverage and ample exit options upon fund maturity. Now no more, as the Fed Fund rate went up from zero- bound to nearly 5% since 2021. Hence, small and medium-sized asset managers – in private and public markets alike – are revamping their operating models so as to retain and enhance their alpha credentials. What they lack in size, they can more than make up for in superior asset returns and client relationships. They believe that the rise of passive funds is unlikely to diminish the appetite for alpha among large institutional investors, such as insurance companies, foundations, endowments, and pension funds. Nor, for that matter, from the emerging generation of self-directed digitally savvy investors who have thus far been actively engaged in dynamic investing in pursuit of market-beating returns. Passives cover 34% of the assets of the world’s 500 largest managers, per the 2024 Thinking Ahead Institute Survey . Outside highly informationally efficient U.S. markets, the creed of alphas will likely remain very much alive. This much is clear from our survey when asked whether a beat-the-market mentality will prevail over time (Figure 1.7): 32% said no, 27% said maybe and 41% said yes. Proponents of alpha envisage opportunities in an extended era of heightened volatility in the face of rising geopolitical risks. As a result , alpha potential will likely prevail for those asset managers who are creating leaner and more agile operating models via new technologies and outsourcing to succeed in this era of radical uncertainty. Small and medium- sized asset managers – in private and public markets alike – are revamping their operating models so as to retain their alpha credentials. Figure 1.7 Will a beat-the-market mentality continue to prevail over time? Source: Citi/CREATE-Research Survey 2025 No Maybe Yes 32 27 41 % of respondents “You have to stick to the knitting and do it well. Lack of a focus on core strengths can raise complexity and work against alpha.” “Private markets are ripe for consolidation. Some 11,000 managers are predicted to coalesce around 100 mega players.” Interview Quotes