The outlook for the global fund industry appears to have some rather ominous storm clouds ahead.
According to a recently released industry study by the Boston Consulting Group of Boston, profits may be nearly halved over the next few years. The survey included 40 large asset management firms, whose holdings equal $8 trillion dollars and span the globe.
Industry profitability could fall to $20 billion a year, down 41% from $34 billion in 2002, according to the report. As well, annual compound growth rates could range from 0.7% to 6% through 2006, compared with annual rates of 14% between 1995 and 2000.
The most profitable firms are likely to break even or take, at most, 11 basis points on assets managed. These pressures are likely to cause "a fierce battle for market share," the firm said.
Last year, investment management firms around the globe saw their assets decline 8% to $31 trillion, Boston Consulting found. As well, the firm found that 40% of global asset management firms are currently taking losses or barely avoiding being in the red. Another 30% reported profits of zero to 19%, and only 10% were reporting profits of 50% or more.
More Outsourcing Ahead
It should also be noted that a significant finding in the survey was that the most profitable North American firms in 2002 have embraced outsourcing as a way to cut costs. This technique has come under tremendous fire from those concerned with the state of employment in the U.S. and domestic economy issues.
"It makes eminent industrial logic for them to take advantage of somebody else's scale, so I imagine that would continue," said Andy Maguire, vice president and director of Boston Consulting Group, who authored the study. However, Maguire also said that this outsourcing doesn't necessarily entail a move to India, or another far-off locale, and that outsourcing can be done within a domestic market. Further, most medium-sized firms looking to outsource some of their business don't necessarily have the skills or expertise to move those portions of their operations overseas straight off the bat, he said.
It is also anticipated that the past trend of large-scale acquisitions will come to a halt. Instead, companies will favor partial acquisitions of desired divisions, teams or product groups.
"You lift out what is distinctive about a firm," said Dennis Dolego, director of research for Optima Group of Fairfield, Conn. "Let's say you are a large bank, and you want to pull in house a high-net-worth asset manager. You could buy a small to medium-sized asset management company, or you could just lift out their portfolio management people. The benefit is cutting the cost of the acquisition."
This can be extremely beneficial in an environment where cost cutting is of the essence, as a complete acquisition often brings about redundancy that can be a significant financial burden. With the lift-out idea, a company is taking what it specifically needs, and leaves the unneeded, peripheral operations untouched, Dolego said.
The report also found that the structure of the market has a significant impact on revenue. For example, the United States and Britain work in an open market system with large numbers of independent players and a primarily non-restrictive product distribution system. However, funds in Continental Europe largely rely on banking and insurance groups for distribution, which restricts the inflow of revenue. Britain was at the top of the charts when it came to nations with the most declining assets, with a 17% reduction from 2001 to 2002.
Overall, the report found that the North American market was slightly more profitable in 2002, with a cost-to-income ratio of 63% compared to 68% for Continental Europe.
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