The USD58trn global asset management industry faces rising headwinds and its growth has stalled, putting the industry’s attractive economics at risk, according to a report released by The Boston Consulting Group (BCG).
The report, titled Capturing Growth in Adverse Times: Global Asset Management 2012, provides the findings of BCG’s tenth annual study of the worldwide asset-management industry.
Asset managers collectively failed in 2011 to attract significant flows of net new assets, the study found, as they have failed to do every year since the global financial crisis began in 2008. At the same time, the number of managers able to win those new assets contracted further. The result is an acceleration of a winner-take-all trend that is redefining the industry landscape.
BCG’s research revealed more starkly than ever an industry in transition, competing internally and externally for an eroding share of the global pool of investor assets. "This is the new normal for investment managers, and for the foreseeable future it will define which business models and providers prosper and which ones fail," the report concludes.
"In the new normal, asset managers cannot stay the same," says Gary Shub, a BCG partner and the lead author of the report. "To grow, they need to constantly reassess their value proposition and the operating model required to deliver that proposition."
While the industry remains profitable, having rebounded from its 2009 low, its operating margins were essentially flat in 2011 and have not recovered to levels achieved before the 2008 crisis, the report says. Further, prices in some segments declined in 2011, exacerbating the longer-term revenue pressures resulting from a shift to lower-fee passive and fixed-income products.
The study draws on a detailed benchmarking of more than 100 industry participants that BCG conducted in early 2012, representing 48 per cent of global assets under management. The report also reflects a comprehensive market-sizing effort covering 42 major markets representing more than 98 per cent of the global asset-management business.
The research revealed wide variation among and within regions in the growth of assets under management in 2011. Asia (excluding Japan and Australia) and Latin America grew the strongest, increasing AUM five per cent and 12 per cent, respectively, on average. North America registered essentially no growth, while Europe gave up half the gain it made from 2007 to 2010. Japan and Australia declined three per cent and two per cent, respectively, while the Middle East and South Africa expanded their AUM just one per cent.
While difficult and turbulent times demand strategic reinvention, they also offer fresh opportunities, according to BCG’s study. In support of that thesis, it identifies strategies that differentiate "emerging winners" from the rest of the pack. It also offers guidance to asset managers for differentiating themselves based on their market, segment, size, capabilities, and product choice.
"There are two business models best positioned to succeed going forward," says Monish Kumar, senior partner and the global leader of BCG’s asset management segment. "One is the large, diversified asset manager with scale and expertise in multiple product, segment, and market/geography combinations. The second is the smaller manager highly focused on just one of those combinations and earning the right to win there."
Supporting the winner-take-all trend among investment managers is a shift in investor preferences away from traditional offerings. Actively managed core assets declined in 2011 in percentage terms, while passive, alternative, and specialty asset classes and solutions grew. The few providers that have successfully adapted to that market shift have benefited disproportionately. Most managers have failed to respond and have lost assets under management as a result.
To succeed, managers must address specific investor needs, including capital preservation, guaranteed-income features, and broader asset-class diversification, the report says. The industry continues to confront a two-speed world, which constrains the growth potential of existing businesses based in slow-growth developed markets. AUM in developed markets has declined by one per cent yearly since 2007, while AUM in developing markets has experienced a compound annual growth rate of seven per cent.
Further complicating the revenue outlook, wealth managers and distributors have begun to capture more of the profit pool. Wealth managers’ direct relationship with investors is allowing them to capture a larger share of fees. The clout of distributors is expected to increase further due to regulations that in some markets prohibit payments by asset managers to distributors.