Industry Is at a Critical Juncture as Market Volatility, Revenue Pressure, and Cost Challenges Dampen Previous Gains; New Strategies Will Be Required to Seize Opportunities in a Tougher Environment, Says New BCG Report
NEW YORK—Asset managers must blaze new strategic trails to put their growth trends on a more consistent track following a difficult year—especially in an industry largely dominated by a small number of players—according to a new report by Boston Consulting Group (BCG). The report, titled How Asset Managers Can Win in a Winner-Takes-All World is being released today.
Positioned as a precursor to BCG’s annual Global Asset Management study, which is due out later this year, the report offers a comprehensive look at industry performance in 2018, examines the battle between active and passive strategies, and explores the winner-takes-all dynamic. Sounding a call to action, the report also outlines optimal next steps for asset managers in their quests to stem the tide and gain or maintain competitive advantage.
"In a worst-case scenario, by 2023, profits will have decreased by nearly one-third," said Renaud Fages, a BCG partner based in New York, coauthor of the report, and global leader of the firm’s asset management segment. "However, the outlook is not entirely gloomy. Challenging periods present opportunities for change and, in a largely winner-takes-all world, the chance to get ahead of the competition."
A Difficult Year in Terms of Overall Performance. According to the report, the asset management industry, after several years of stellar performance, found in 2018 that it had to adjust. Bouts of financial-market volatility, tightening monetary policy, and slowing global growth created a more challenging environment.
Assets under management (AuM), net inflows, and revenues came under considerable duress. In a sample of 30 managers from around the world representing AuM of $39 trillion—roughly half the industry—BCG found that AuM fell by 4% in 2018, a marked turnaround from the 12% rise seen in 2017. Net new flows, meanwhile, were 0.9%—considerably weaker than the record 3.1% seen in 2017. The historical average is about 1.5%.
The shifting patterns of AuM were reflected in revenues, with aggregate revenues rising by 3%, measurably less than the 9% gain seen in 2017. Costs, meanwhile, continued to rise as the industry struggled to adjust to the macroeconomic environment and firms invested in, for example, data and analytics. Regulatory measures, such as the updated Markets in Financial Instruments Directive, were also major drivers of increasing costs. The average cost-to-income ratio of our sample was 66% in 2018, up slightly from 65% 2017.
Active Asset Managers Are Feeling the Heat. The battle between active and passive strategies continued to play out in 2018, with passive grabbing most of the net 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. One-third of the top 15 were dedicated to such motifs. The European market continued to lag behind the US in that respect. Just 5 of the top 15 strategies were passive, while the remainder were active.
"Passive is increasingly popular with both retail and institutional investors, and a price war is proceeding apace," said Dean Frankle, a BCG principal based in London, coauthor 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."
The Winner-Takes-All Dynamic. Overall, in terms of flows, 2018 was a challenging year. In the US, $620 billion of inflows were offset by $491 billion 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 ten US players captured 81% of net mutual fund flows of firms with positive flows, compared with 85% in 2017. In Europe, the top ten accounted for 29% of inflows in 2018, compared with 35% in 2017. The winner-takes-all trend was less entrenched there, mainly because both the market and distribution methods are more fragmented.
Optimal Next Steps for Asset Managers. 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, meanwhile, may comprise refocusing on client retention, leveraging data and analytics, and seeking M&A opportunities. But BCG concludes that, in truth, neither approach alone is sufficient: CEOs must embrace both. In a time of adversity, the most unwise choice is to do nothing.
"As leaders contemplate a tougher future, they should concentrate on costs with a simultaneous focus on ensuring that clients are highly motivated to remain on board," said Qin Xu, a BCG partner based in Hong Kong, coauthor of the report, and the firm’s asset management topic leader in Asia. “However, asset managers may also consider more aggressive approaches, including leveraging advanced analytics, introducing products, moving into new locations, and merging with peers. A downturn brings inevitable risk. Viewed constructively, however, it may present an inviting window of opportunity.”
A copy of the report can be downloaded How Asset Managers Can Win in a Winner-Takes-All World.
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