Asset managers must focus on new strategies to put their growth on a more consistent footing following a difficult year, especially in an industry dominated by a small number of players, according to a new report from US-based Boston Consulting Group (BCG).
The report notes that the asset management industry, after several years of stellar performance, struggled with a more challenging environment in 2018, caused by bouts of financial market volatility, tightening monetary policy and slowing global growth. Assets under management, net inflows and revenues all came under considerable stress last year.
In a study of global managers representing $39 tn in assets under management – roughly half the industry – BCG finds that assets under management fell by 4 percent in 2018, in stark contrast to the 12 percent rise seen in 2017. New inflows, meanwhile, were up 0.9 percent – a decent return in the circumstances, but considerably weaker than the record 3.1 percent seen in 2017. The historical average stands at about 1.5 percent.
The shifting patterns of assets under management were reflected in revenues, with aggregate revenues rising by 3 percent, measurably less than the 9 percent gain seen in 2017. At the same time, costs continued to rise as the industry struggled to adjust to the macroeconomic environment and firms invested in areas such as data and analytics.
Regulatory measures, particularly Mifid II, were also major drivers of increasing costs. The average cost-to-income ratio in this study was 66 percent in 2018, marginally up from 65 percent in 2017.
‘In a worst-case scenario, by 2023 profits will have decreased by nearly one third,’ warns Renaud Fages, a BCG partner based in New York, co-author of the report and global leader of the firm’s asset management segment, in a statement. ‘The outlook is not entirely gloomy, however. Challenging periods present opportunities for change and, in a largely winner-takes-all world, the chance to get ahead of the competition.’
The battle between active and passive strategies continued to play out in 2018, with passive grabbing most of the inflows in the US, while active held its own in Europe and Asia-Pacific. Ten of the 15 most popular strategies in the US were passive, with global, emerging market and specialty themes continuing to prosper, making up one third of the top 15. Europe, where just five of the top 15 strategies were passive, continued to lag the US.
‘Passive is increasingly popular with both retail and institutional investors, and a price war is proceeding apace,’ says Dean Frankle, a BCG principal based in London, co-author of the report and the firm’s asset management topic leader in the UK. ‘Some active managers have responded by restructuring fee schedules, shutting underperforming funds and launching new products.’
In the US, $620 bn of inflows were offset by $491 bn of outflows. The trend in recent years has been for winning firms to capture the lion’s share of inflows, and that continued in 2018, albeit at a slightly slower rate – and mainly in the US.
The top 10 US players captured 81 percent of mutual fund flows of firms with positive flows, compared with 85 percent in 2017. In Europe, the top 10 accounted for 29 percent of inflows in 2018, down from 35 percent.
According to BCG, there are two key strategic approaches for asset managers working to prepare for the future: shoring up defenses and adopting more aggressive strategies. Defensive moves include focusing intently on costs, reviewing the portfolio and optimizing pricing. Aggressive strategies may comprise refocusing on client retention, leveraging data and analytics and seeking M&A opportunities.
‘As leaders contemplate a tougher future, they should concentrate on costs with a simultaneous focus on ensuring clients are highly motivated to remain on board,’ notes Qin Xu, a BCG partner based in Hong Kong, co-author of the report and the firm’s asset management topic leader in Asia.
‘But asset managers may also consider more aggressive approaches, such as leveraging advanced analytics or moving into new locations. A downturn brings inevitable risk but, viewed constructively, it may present an inviting window of opportunity.’