But Best Performance Since 2010 Does Not Mask Underlying Trends Exerting Significant Margin Pressure; Players Must Take Action to Secure Positive Trajectory for the Future, Says Report by The Boston Consulting Group
NEW YORK—Although asset managers can celebrate a record year for the industry, they need to prepare for a business environment that may look vastly different within five years—one transformed by new technologies—or risk a future of uncertainty, according to a new report by The Boston Consulting Group (BCG). The report, titled TheHidden Pressures on Asset Managers, is being released today.
A precursor to BCG’s annual Global Asset Management study set for release in July, the report offers a comprehensive look at industry performance in 2017, including the surge in net new flows and revenues, trends in active investing, the rise of “smart beta” strategies, the concentration of asset flows, and key profit-squeezing forces.
“The strategic problem for asset managers is not the need to know what is coming, but the need to take the actions required to stay in front of whatever occurs,” said Brent Beardsley, a BCG senior partner, co-author of the report, and global leader of BCG’s asset and wealth-management segment. “Some bold moves will be required—radically overhauling technology, entering new markets, and making acquisitions, among others. These are daunting challenges, but the extraordinary market-led performance of 2017 puts many players in a strong position to take them on.”
The surge in net new flows and revenues. According to the report, strong equity markets globally made 2017 an exceptionally good year for asset managers. Based on a preliminary sample of 30 institutions representing $34 trillion of assets under management (AuM), or roughly half the industry—a sample that will be expanded in BCG’s July report—AuM grew by 14% in 2017. That translated into an 11% increase in the average AuM held throughout the year. Net new flows were an extraordinary 4.3%, the highest level in the ten years since the global financial crisis, and asset managers’ revenues increased by 9%. There was continuing pressure on fees, which appear to have declined by roughly 0.4 basis points (bps). However, costs also declined by 0.4 bps.
Trends in active investing. The report says that money continued to move from traditional products to alternatives, solutions, and specialties—and, more generally, from active to passive strategies. Yet active strategies showed resilience, accounting for 6 of the top 15 strategies in the US, measured by net flows, and 10 of the top 15 in Europe and Asia. In the US, some traditional active strategies such as intermediate-term and multisector bonds moved back up the rankings. In Europe, strong active products included many specialties and solutions along with traditional strategies.
The rise of smart beta strategies. A notable industry development is the ongoing advance of smart beta strategies, which passively track an index but include an active, rules-based component. Securities are selected and weighted by criteria other than market capitalization alone, which creates the possibility of outperforming the market. With only about $430 billion of AuM (0.5% of the global total), smart beta is a small part of the industry. But it has been growing at a rate of 30% a year since 2012 compared with a 13% annual growth rate for standard passives.
The concentration of asset flows. The report also says that strong market conditions meant that most asset managers enjoyed AuM growth and positive net new money in 2017—many more than in 2016. But performance varied considerably. Top-quartile players increased their AuM by 17% or benefited from net flows above 6% of AuM, while bottom-quartile players increased their AuM by 6% or achieved only 1% in net flows. US mutual fund flows remained concentrated among the top ten players.
Key profit-squeezing forces. BCG says that the root cause of reduced average fee income is pressure on the pricing of individual products. Along with pressure on revenues, asset managers face forces that are pushing up costs, such as necessary investments in new technology and in regulatory compliance. The effect of these trends on profit margins will depend on the rate at which they develop and on the growth of AuM. Our business-as-usual scenario, under which recent trends will continue, sees profit margins falling from 38% at the end of 2017 to 36% in 2021. However, were a market correction to occur, followed by a slow recovery over several years, AuM could fail to grow at all. Under this scenario, we would expect margins to decrease to 30%, but they could fall as low as 27%.
“Asset managers can celebrate the industry’s best year since 2010,” said Renaud Fages, a BCG partner, co-author of the report, and global leader of the firm’s asset management topic. “But they should not let it blind them to the underlying trends that are putting pressure on their margins. Top players will continue to capture a larger share of net inflows as rapid advances in technology increase the need for scale in asset management.”
A copy of the report can be downloaded https://on.bcg.com/2rdDxUC.
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