Although worldwide assets under management rose 8% in 2010 from the previous year to $56.4 trillion and profit margins gained two percentage points to 33%, the industry faces a number of challenges for continued growth.
Most notably, assets managers are heading into a "two-speed world" with low-cost beta products on the one hand and exotic alternatives and outcome-oriented products on the other.
That was the key finding in Boston Consulting Group's report released last week, "Global Asset Management 2011: Building on Success."
The biggest challenges include a weak economic recovery, more demanding retail and institutional investors emerging from the financial crisis; continued demand for safe-haven, passive, low-margin products; weak inflows to equities and other funds with higher fees; tighter regulations; and widely diverse markets that makes creating a cohesive sales and marketing strategy extremely difficult.
In the U.S., additional risks include rising commodity prices, high unemployment, continued weakness in housing and budget deficits among the private and public sectors that will take years to unwind, according to BCG.
"It will be an exciting and unpredictable industry going forward," said Monish Kumar, senior partner and leader of BCG's U.S. East Coast Financial Institutions practice.
"Economic uncertainty lingers, and the full potential of money in motion will be difficult to capture," Kumar added. "The question of how to achieve further growth in both mature and emerging markets is a daunting one. Asset managers will need to forge thoughtful strategies in order to build on the successes we have seen."
Boston Consulting Group emphasized that while global assets grew in 2010, that growth was primarily driven by the continued recovery of the equity markets, much as in 2009. Net new inflows were only marginally positive, rising slightly less than 0.5%.
Inflows varied greatly by region, as well, with the Americas posting net outflows of 0.4%. Asia-Pacific saw inflows rise 5.6%, and in Europe, asset managers posted net outflows of 0.4%.
Total AUM also varied by region. The strongest growth was in Latin America, where assets soared 18%. North America's AUM rose 8%, led by the United States at 8.5%. Assets in Europe rose by 7%, and in Japan and Australia, assets rose 2%, whereas in the rest of Asia, assets increased by 11%.
This rise in assets boosted profitability for managers, with average revenue margins increasing to 29.8 basis points, up from 29.0 basis points in 2009. Costs remained steady at 20 basis points.
While profit margin as a share of net revenues reached 33% in 2010, it is still considerably lower than the 39% it reached in 2007 just before the Great Recession began.
"Profits are still 23% below 2007 levels because assets have not returned in a meaningful way to equities," Kumar noted. "There is a more conservative bent to the money being invested and much faster growth in low-cost beta products. There is a secular dimension to this. Nonetheless, in 2010, 42% of asset managers' profits increased by 30% or more."
These healthy profit margins have dissuaded parent companies to divest their asset management units, with the pace of mergers and acquisitions slowing in 2010, BCG said. However, M&As are likely to pick up as firms look to offer alternative products or move into emerging markets, BCG predicted. By 2014, assets under management in emerging markets should deliver 10% to 12% of asset managers' revenue, BCG predicts.
"You can see that there is widespread good news across the asset management industry. However, there are a number of headwinds," Kumar said.
As to why investors have become more demanding, Brent Beardsley, partner and topic expert for asset management in the U.S., said the financial crisis and the Bernard Madoff ponzi scheme have made institutional and retail investors far more cautious.
"Investors are more demanding on the institutional side," Beardsley said, "with a long due diligence cycle that includes thorough, sophisticated risk management analysis and greater requirements for transparency. On the retail side, distribution platforms are becoming more institutionalized, and brokers are using more wrap programs, which means they accept fewer products on their shelves."
As to what types of funds investors are now looking for coming out of the recession, Beardsley said that in the early 1990s, there was a "massive equity bull run" and in the 1970s, investors poured into gold and commodities.
Boston Consulting Group does not expect investors to once again embrace equity funds but to instead gravitate to a bar-bell mix of passively managed index and exchange-traded funds on the one hand, and alternative and outcome-oriented funds such as target-date and absolute-return funds on the other hand, Beardsley said.
While actively managed assets still account for 80% of global AUM and are expected to remain above 70% for some time, their share is slowly declining, BCG said.
A 'Two-Speed World'
"This two-speed world will put a massive squeeze on traditional, long-only equity fund managers," Beardsley said.
"This is a big deal for the industry because it cuts directly into their profit margins," Kumar emphasized. "The move away from equity funds is a very material trend with huge implications for the industry's economics. The big question is, will things go back to normal or are we in year three of a 20- to 25-year decline in profits for the asset management industry? The buoyancy in the markets in 2009 and 2010 may have simply masked problems that have not yet have emerged. In fact, the asset management industry may be moving into slow growth-or even decline."
As for the coming year, Beardsley said: "Traditional, active products will remain under pressure. Investors remain focused on the uncertainty of the markets and the instability of the economic recovery."
So what steps does Boston Consulting Group recommend that asset managers take to remain profitable?
Sharpen the value proposition. "Asset managers need to review what they do best, make it distinctive and market it powerfully," the BCG report said.
Focus more on the end customer. On the retail side, BCG recommends that asset managers get a better understanding of what the investor wants in terms of products, services and channels. On the institutional side, BCG says asset managers need to improve service and reporting.
Enhance relationships with distributors. Provide better training on products, more thorough investment outlooks and become an active "thought partner" with distributors with regards to new sales approaches, BCG says.
Wean underperforming products from the lineup. Asset managers do not eliminate poor performers often enough, according to the consulting firm.
Explore innovation. Asset managers in particular should help investors protect capital in an inflationary environment, offer retirement income solutions, address longevity risk and rising taxes and develop products that mitigate risk and market volatility, according to BCG.
Master the regulatory climate. Managers must keep abreast of regulatory developments to provide guidance to clients and adapt business models.
Revisit resource allocation. Focus only on the most profitable clients and products, BCG advises.
Worldwide assets under management rose 8% in 2010 to $56.4 trillion. Profit margins gained two percentage points to 33%. Yet the industry faces a number of challenges to continued growth.
Most notably, assets managers are heading into a "two-speed world" with low-cost index-tracking products on the one hand and exotic alternatives and outcome-oriented products on the other.
That was the key finding in a Boston Consulting Group report released last week, "Global Asset Management 2011: Building on Success."
The biggest challenges include a weak economic recovery, more demanding retail and institutional investors emerging from the financial crisis, continued demand for safe-haven, passive, low-margin products, weak inflows to equities and other funds with higher fees, tighter regulations and widely diverse markets that make creating a cohesive sales and marketing strategy extremely difficult.
In the U.S., additional risks include rising commodity prices and high unemployment as well as continued weakness in housing and budget deficits among the private and public sectors that will take years to unwind, according to BCG.
"It will be an exciting and unpredictable industry going forward," said Monish Kumar, senior partner and leader of BCG's U.S. East Coast Financial Institutions practice.
"Economic uncertainty lingers, and the full potential of money in motion will be difficult to capture," Kumar added. "The question of how to achieve further growth in both mature and emerging markets is a daunting one. Asset managers will need to forge thoughtful strategies in order to build on the successes we have seen."
Boston Consulting Group emphasized that while global assets grew in 2010, that growth was primarily driven by the continued recovery of the equity markets, much as in 2009. Net new inflows were only marginally positive, rising slightly less than 0.5%.
Inflows varied greatly by region, as well, with the Americas posting net outflows of 0.4%. Asia-Pacific saw inflows rise 5.6%. In Europe, asset managers posted net outflows of 0.4%.
Total AUM also varied by region. The strongest growth was in Latin America, where assets soared 18%. North America's AUM rose 8%, led by the United States at 8.5%. Assets in Europe rose by 7%, and in Japan and Australia, assets rose 2%, whereas in the rest of Asia, assets increased by 11%. This rise in assets boosted profitability for managers, with average revenue margins increasing to 29.8 basis points, up from 29.0 basis points in 2009. Costs remained steady at 20 basis points.
While profit margin as a share of net revenues reached 33% in 2010, it is still considerably lower than the 39% it reached in 2007 just before the Great Recession began.
"Beta" products are popular with investors afraid of risk. Beta refers to lower-risk products that aim to simply track the market, such as an index, exchange-traded fund or other passively managed fund.
"Profits are still 23% below 2007 levels because assets have not returned in a meaningful way to equities," Kumar noted. "There is a more conservative bent to the money being invested and much faster growth in low-cost beta products. There is a secular dimension to this. Nonetheless, in 2010, 42% of asset managers' profits increased by 30% or more."
As to why investors have become more demanding, Brent Beardsley, partner and topic expert for asset management in the U.S., said the financial crisis and the Bernard Madoff ponzi scheme have made institutional and retail investors far more cautious.
"Investors are more demanding on the institutional side," Beardsley said, "with a long due diligence cycle that includes thorough, sophisticated risk management analysis and greater requirements for transparency. On the retail side, distribution platforms are becoming more institutionalized, and brokers are using more wrap programs, which means they accept fewer products on their shelves."
As to what types of funds investors are now looking for coming out of the recession, Beardsley said that in the early 1990s, there was a "massive equity bull run" and in the 1970s, investors poured into gold and commodities.
BCG does not expect investors to once again embrace equity funds but to instead gravitate to a bar-bell mix of passively managed index and exchange-traded funds on the one hand, and alternative and outcome-oriented funds such as target-date and absolute-return funds on the other hand, Beardsley said.
While actively managed assets still account for 80% of global AUM and are expected to remain above 70% for some time, their share is slowly declining, BCG said.
"This two-speed world will put a massive squeeze on traditional, long-only equity fund managers," Beardsley said.
"This is a big deal for the industry because it cuts directly into their profit margins," Kumar emphasized. "The move away from equity funds is a very material trend with huge implications for the industry's economics. The big question is, will things go back to normal or are we in year three of a 20- to 25-year decline in profits for the asset management industry? The buoyancy in the markets in 2009 and 2010 may have simply masked problems that have not yet have emerged. In fact, the asset management industry may be moving into slow growth-or even decline."
So what steps does Boston Consulting Group recommend that asset managers take to remain profitable?
Sharpen the value proposition. "Asset managers need to review what they do best, make it distinctive and market it powerfully," the BCG report said.
Focus more on the end customer. On the retail side, BCG recommends that asset managers get a better understanding of what the investor wants in terms of products, services and channels.
Enhance relationships with distributors. Provide better training on products, more thorough investment outlooks and become an active "thought partner."
Wean underperforming products from the lineup. Asset managers do not eliminate poor performers often enough, according to the consulting firm.
Explore innovation. Asset managers in particular should help investors protect capital in an inflationary environment, offer retirement income solutions, address longevity risk and rising taxes and develop products that mitigate risk.
Master the regulatory climate. Managers must keep abreast of regulatory developments to provide guidance to clients and adapt business models.
Revisit resource allocation. Focus only on the most profitable clients and products, BCG advises.MME
