The global asset management industry ended 2019 on a high note—only to face a new chapter of economic turmoil when the coronavirus pandemic broke out in early 2020. In 2019, total assets under management (AuM) grew by 15%, to $89 trillion. Retail clients were the fastest-growing segment, with assets rising by 19%, while institutional client assets grew by 13%. North America, the world’s largest asset management region, showed the strongest growth at 19%, or $7 trillion in value, due to a combination of strong consumer spending, historically low unemployment, and quantitative easing. In China, the second-largest single market after the US, AuM expanded by an estimated 10% in 2019, driven largely by a strong retail investor segment. Yet even when the markets were soaring and asset flows were the highest they had been in a decade, the asset management industry faced a set of structural challenges brought on by fee compression and mounting cost pressures—and the result was a marginal decrease in profitability.
In the year ahead, it will be essential for asset managers to address their asset flows and profitability through continued structural changes in such areas as product innovation, cost structure, and growth strategies.
In this 18th annual BCG report on the global asset management industry, we look at the industry’s challenges and opportunities through the lens of one of the strongest asset classes: alternatives. This category comprises nearly half of all global asset management revenues, despite representing only 16% of AuM, and we expect to see alternatives approach 50% of global revenues by 2024. One of the tailwinds driving this growth is a rise in nontraditional return profiles for some product subcategories.
Still, we found that not all alternatives are created equal. Private markets—including private equity, real estate, infrastructure, and private debt—have grown assets at a breakneck compound annual growth rate of 9% since 2008, and they currently represent 60% of revenues in alternatives. Hedge funds, by contrast, have seen their asset growth decline as overall returns over the past decade have trailed the S&P, although capital still flows disproportionately into the larger funds, with AuM of more than $5 billion. At a time of fierce competition for limited investor capital, asset managers in the alternatives space will need to identify opportunities to rebuild and grow, establishing an edge through technology, expertise, and scale.
Moreover, in the next big wave of competition, successful industry players will need to create world-class client experiences that extend beyond performance at a given cost and into a more all-encompassing value proposition for the client. To that end, the firms that lead in distribution are beginning to put a number of best practices into effect. They are creating data-driven business intelligence to help the entire organization develop a deeper understanding of client needs. To enable that intelligence, they are building strong data science capabilities that operate in partnership with sales and marketing. The roles of these two functions are evolving as marketing teams become key players rather than just serving a support role. Top firms are also bringing the personalized needs of clients into the product development process, increasingly tailoring their products to such areas as environmental, social, and governance (ESG) investing. And they are revamping their internal cultures to ensure that the compensation structure pays attention to increasing customer satisfaction as well as to such traditional business metrics as meeting sales goals.
In working with investors from the insurance industry, which holds nearly 15% of total AuM globally but is likely to face challenges in the present economy, asset managers have an unprecedented opportunity to add value by acting more as partners and advisors to investors. To do so, however, they must alter their service model, focusing on such needs as risk management support and flexibility in products and pricing.
The year 2020 will not be an easy one for the industry, but it could mark the start of a pivotal era in which investors become more judicious about who they trust with their assets, and the asset managers that flourish are those that innovate and evolve to fit the new realities ahead.