Assets are managed on behalf of end-investors, whether institutional (such as pension funds and life insurance companies) or retail, the former typically through Separately Managed Accounts, the latter through Collective Investment Schemes. The industry’s Assets Under Management (AUM) are currently estimated at around $ trillion globally (TheCityUK (2013)). 1 This is large. It is equal to around one year’s global GDP or around three quarters of the assets of the global banking industry. It has also grown fairly rapidly, with AUM roughly doubling over the past decade in dollar terms. The longer-term picture is more striking still. In the United States, AUM have risen almost fivefold relative to GDP since 1946, from around 50% of GDP to around 240% of GDP (Chart 1). In the United Kingdom this pattern has been replicated, but over a much shorter time period since around 1980 (Chart 2). Across most OECD countries, the patterns are similar. The asset management industry has, it appears, come of age. The drivers of this growth are reasonably well-understood. The pool of prospective global savers has become larger, older and richer, each of which tends to be a boon for the asset management industry. Since 1950, average life expectancy has risen by nearly 50%, world population has risen by a factor of three and world GDP per capita has risen by a factor of nearly 40. There is a strong cross-country correlation between GDP per capita and AUM relative to GDP (Chart 3).
With attention focused on money markets, the spotlight also fell upon central banks who implement their monetary policy in money markets by influencing the level of interest, via the supply of liquidity. Moreover, the central banks are the only market participants who are in a position to create the liquidity used in the interbank payment systems. The kind of upheaval observed in the international money markets over the past few months has never been witnessed in living history. Rumours and reports of substantial sub-prime positions at banks led to a sudden loss of confidence in international financial institutions. Moreover, these banks are, to some extent, uncertain about their own future liquidity situation. Consequently, banks subsequently began hoarding liquidity and became extremely cautious when granting credit to each another. The market for unsecured interbank loans over longer terms collapsed and at times the market for foreign exchange swaps dried up. Since then, banks have been unable to obtain unsecured funds for terms of more than a few days or weeks – or have been able to do so only by paying substantial interest premiums. There were three factors that exacerbated the money market disruptions. First, bank securities holdings that had supposedly been first class and liquid proved to be illiquid, thereby failing to serve as a source of supplementary liquidity. Second, other participants in the financial markets also faltered in their supply of liquidity to the banks. Their confidence in banks suffered because money market investments that had been considered safe suddenly turned out to be risky.