Despite the fact global assets under management increased, asset managers continue to face challenges as they struggle to earn a profit, according to a report released Tuesday by The Boston Consulting Group.

The eighth annual report on the global asset management industry revealed that professionally managed assets rose 12% to $52.6 trillion last year, up from a decline of 17% a year earlier. On average, assets under management increased 11% in North America, 12% in Europe, 7% in Japan and Australia, 25% in the rest of Asia and 22% in Latin America, the report said, driven primarily by rebounding equity markets. Only about 1% of growth came from new net inflows.

But average assets under management slid 4% and net revenues declined by 11%. Even though asset managers were able to reduce overall costs by an average of 7%, operating margins tumbled 19% in 2009, according to the report.

“A higher share of lower-margin products, pressure on prices, and structural cost increases will make it difficult to regain peak historical profitability levels in the future,” Kai Kramer, a partner at the Boston Consulting Group and leader of its global asset-management practice, said in a press release.

The good news is that there is expected to be higher levels of assets under management in 2010 and a better expected product mix, which could result in average profit margins rebounding to as much as 35% of net revenues in 2010, up from about 31% in 2009, 34% in 2008, and 40% in 2006.

The report also examined a number of trends in the asset management industry. The report found greater differences across asset managers in terms of revenues, costs, and profits in 2009. While two-thirds of asset managers managed to reduce their overall costs, less than 20% raised their profitability. Profits became more concentrated as investors put their money with the biggest and most trusted companies. The top 20% of asset managers, in terms of net inflows, attracted 88% of net sales in 2009 and represented only 23% of assets under management, while 37% of asset managers posted outflows.

Meanwhile, the demands investors place on their asset managers continues to grow. Investors are scrutinizing asset managers more and asking questions about risk management, transparency, and overall service levels.

The report says there is a trend toward more passively managed products than actively managed ones, which means the traditional, actively managed products are “squeezed” by the passive and alternative offerings.

The trend toward emerging markets will continue to grow, even though emerging markets’ share of global assets under management and revenue pools will remain relatively constant over the next few years, the report said. Nonetheless, emerging markets will likely represent more than 25% of net sales between 2010 and 2014.

In order for asset managers to gain trust and recruit and retain more investors, they will have to cut costs and focus on their target markets and distribution. There will be more opportunities for mergers and acquisitions both nationally and internationally and new partnerships are also a possibility.

“Whether we’re talking about fast-growing Asian markets, for example, or retirement markets in mature economies, opportunities still abound for asset managers,” said Kramer. “Despite highly uncertain times, stable and substantial growth is achievable.”

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