Adapt or die may be something of a hackneyed expression, but it has never been more applicable to today’s asset management industry, as highlighted in a new industry report.
Rebooting the global asset management industry – a study from Citi and CREATE-Research – predicts a broadening gap between mega fund managers and smaller niche specialists as a result of the ongoing drive to low-cost passive investment strategies.
Professor Amin Rajan, CEO of CREATE-Research and the report author, says the multi-trillion-dollar asset management houses will continue to swallow up smaller and medium sized competitors in their pursuit of global assets.
” An ill wind has been blowing through the industry over the past decade, causing unusual reversals. Asset in-flows have been mostly going to mega indexers… and alongside the recalibration of the value chain, industry consolidation will continue,” Rajan says.
No surprise then that 61 per cent of 269 asset managers with a total of USD37.7 trillion is asset under management, say the rise of passive funds is a challenge.
Yet, the mega-funds’ land grab will still allow boutique managers to secure a place offering their own specialist active funds.
Rajan says: “The demand for alpha returns will likely remain insatiable. Thus, alpha–beta barbelling will continue to bifurcate the asset industry. At one end will be mega players offering low-cost passive funds and active funds with acceptable levels of returns. At the other end will be specialist niche players with a deep talent pool and cutting-edge technology to deliver market-beating returns and client experience. They may remain independent by bootstrapping their way to prominence; or be stand-alone boutiques within larger players.”
The research reflects the trend to allow cost=conscious culture, reporting that 59 per cent of asset managers believe offering performance-based fees will be a key feature of a ‘winning business model’ in future.
The asset management industry must also prepare for the now well publicised great generational wealth transfer which will see USD72 trillion pass from the baby boomers to the next generation.
This migration of massive wealth will, Rajan says, create two distinct offerings that will differentiate winners from losers in the investment management sector.
“One will do old things better by avoiding aggressive product push and address their clients’ unique needs within personalised portfolios backed by close client engagement, strong alignment of interests and deep investment expertise. The other offering will deploy digital platforms that democratise private markets or offer diversity of strategies within a single wrapper or direct access to clients. Such platforms will continue to mark a radical departure from how things are done currently,” he says.
Consequently 57 per cent of asset managers say developing technology-assisted personalised portfolios will be a key feature of successful business models.
Rajan warns asset managers that the impact of the wealth transfer is likely to be felt much sooner than expected, as money is bequeathed during life rather than in death.
“These beneficiaries are more open to asset vehicles that deliver their financial and societal goals based on personal ethics,” Rajan says.
