The global asset management industry has reached a tipping point, warns a new study, stating that last year, after roughly a decade of positive momentum, the industry hit a wall amid concerns over rising interest rates and a turn in the economic cycle.
Major asset markets posted negative returns, managers saw outflows, profitability declined and revenue margins contracted, leading in some cases to job cuts, according to the Boston Consulting Group’s study, ‘Global asset management 2019: Will these ’20s roar?’
The priority for many asset managers, notes the report, will be to restore the positive momentum that lapsed in 2018. The value of assets under management fell by 4 percent globally in 2018 from $77.3 tn to $74.3 tn. This was the first significant year-on-year decline since the financial crisis of 2008, and it reversed some of the benefit of 2017 – when assets under management increased by 12 percent, notes the report.
Net new asset flows – the increase attributable to new money coming into asset management firms, minus outflows – amounted to $944 bn, sharply below the 2017 figure of $2.15 tn in new asset flows. Nevertheless, the asset flow decline mostly amounted to a reversion to the mean after a record-setting 2017.
The report reveals the biggest decline in assets under management was in North America, where $2 tn in value evaporated over the course of the year, accounting for two thirds of the global loss in value. North American asset managers saw their 13 percent gain from 2017 turn into a 5 percent decline in 2018 – an 18 percentage-point swing.
Active products continued to struggle in 2018, as actively managed core assets lost $1 tn in assets under management. This was not exclusively a function of poor returns in equity and bond markets but ‘the result of a secular trend,’ asserts the report. Over the past 15 years, active core assets have declined significantly in popularity and now account for just $1 out of every $3 of assets under management, versus more than $1 out of every $2 of assets under management in 2003.
While a lot of the money that has flowed out of active has flowed into passive, this has benefited only a handful of asset managers.
Alternatives – a category that includes hedge funds, private equity, real estate and other holdings – were the strongest asset class in 2018.
Adapting to technology
Highlighting future challenges and the need for managers to adjust, the report notes: ‘A critical consideration going forward is that managers will have a hard time prospering if they don’t make step changes in their use of technology. Businesses across the industry view data and analytics as a route to sharper decision-making, lower costs and turbocharged performance.
‘We see particularly strong potential in investment management and distribution – areas where firms are lacking in technological capabilities. The problem is the high degree of uncertainty regarding the way forward.’
Looking at this issue in more detail, the report warns: ‘Only a few firms are genuinely committed to the data and analytics opportunity. We believe 20 percent to 30 percent of asset managers qualify as pioneers, meaning they are investing in data and analytics with conviction across a broad range of use-cases.
‘Pioneers employ analytics products across the firm and accelerate technology adoption. Many are on their way to building mature data and analytics organizations, though most have not yet reached their destination.
‘The rest still have some distance to travel. The success of their transition is likely to depend on their ability to identify the data and technology that suit them best, to attract and retain necessary talent and to ensure their existing workforce remains on board and can acquire the necessary skills.’
Among the ingredients essential to achieving these aims, the report lists strong leadership, a systematic approach to developing and scaling use-cases and a robust attitude toward technology renewal. ‘Firms that embrace these elements can make significant progress in six to nine months,’ it suggests.
Looking to the 2020s, the report notes that expectations are for the industry to encounter more market volatility, competition and economic uncertainty: ‘But we also see opportunities as the asset management industry evolves and as technology moves to center stage.’
Among the key trends the Boston Consulting Group expects to see dominating the next few years are:
– Active management will have to continue to make its case against passive solutions and alternatives, especially private assets. Fee erosion is likely to persist in any event
– Technology will essentially be table stakes in most markets. Getting it right will require a new strategic agenda and, usually, significant investment. Boston Consulting Group expects most firms to step up their digitization activities, leading to reimagined business models, new technology capabilities, greatly increased efficiency and transformed client relationships
– China will become the second-largest region for asset management, ahead of continental Europe, attracting more flows than the US over the next decade. Emerging markets will become more important
– The ‘winner-takes-all phenomenon’ will accelerate as brand recognition, distribution dominance and scale become ever more critical
– Sustainable investing will rise as firms weave ESG factors into their investment decisions, aiming to create positive impact without undermining returns.
Formula for success
‘Looking ahead,’ the report continues, ‘we expect to see an increasingly binary formula for success. The first option comprises boutique alpha shops – small, focused, nimble businesses that can achieve alpha by using capacity-constrained strategies.’
The second option, the report adds, lies at the opposite end of the scale: distribution powerhouses with more than $1 tn in assets under management that offer a full spectrum of products. ‘We have doubts about the ability of firms in the middle to reinvent themselves to the degree necessary to create sustainable business models. All of them will have to evolve significantly to be successful and some will not make it to 2030,’ the report observes.
There is also a wild card: the role of tech giants. ‘If the likes of Amazon and Google step up, as their peers in China are starting to do, the disruption will be rapid and powerful,’ the report notes, though it does suggest there are nuances to consider: ‘In an industry comprising thousands of players globally and hundreds of billions of dollars in revenues, some firms will find room to carve out their own niches.
‘The decisions asset managers make now – and the capabilities they develop – are likely to play a vital role in driving performance over the coming decade.’