The global asset management industry has enjoyed unprecedented growth over the last two years, but there is a fly in the ointment which will not be that easy to remove.
The global asset management industry grew 11 percent in pandemic-hit 2020 to have over $103 trillion of assets under management globally, according to a study published Thursday by the Boston Consulting Group.
The report called «The $100 Trillion Machine» said the rise in assets under management was only half that of 2019 but an impressive result given the disruption to markets. However, the study highlighted that profit growth was miniscule.
$2.8 Trillion in Net Inflows
The growth in assets under management shows that in some respects asset managers are performing well. Net inflows from retail investors grew 4.4 percent, twice the growth from institutional investors, making for a 3.1 percent rise in total net inflows to $2.8 trillion.
The key contributors to aggregate flows globally were fixed-income products, which received additional support from various government stimulus programs, and money market funds. Money market funds grew by 12% due to their heightened popularity during the pandemic.
Exchange traded funds grew by even more. Equity products grew 21 percent and fixed income by 24 percent. Private equity products soared 20 percent and even alternative investments grew 11 percent.
Almost No Profit Growth
However, things are far from perfect in the world of asset management because despite of the growth in assets under management, profit growth was low. BCG said their revenues grew 3 percent and their profits a meager 1 percent.
Margins Shrink More Than Costs
The asset management industry’s structural problem has been known about for a long time. The pressure to invest remained high which drives up costs while at the same time margins are shrining due to price pressure. BCG calculated that 2020 net revenues as a share of assets under management shrank by 1.6 basis points from 2019 while costs shrank by just 0.9.
One reason for this is that passive investment products such as ETFs have been the fastest growing asset class for years. Passive investments have been the fastest growing asset classes, with assets under management growing 17 percent in 2020. BCG expects them to grow by 9 percent a year over the next five years.
However, the share of revenues from these product remained stubbornly unchanged at 6 percent despite the high growth in net inflows.
By comparison alternative investments make up just 15 percent of the product range but delivered 42 percent of total revenues, making them the highest earners for institutional asset managers.
The Prescription
BCG’s advice to asset managers is firstly a sharper focus on tailored products in the alternative and private equity sectors.
Asset managers who do not yet have these products would have to choose whether to build their own capacity, acquire it or collaborate.
Value for Money
Secondly, asset managers will also have to give clients something for their fees, i.e. performance. Most net inflows go into products with above-average Morningstar ratings but which also offer a below-average total expense ratio, BCG said.
Thirdly, attracting and retaining talent is key as well as complementing their expertise with technology. BCG said this applied especially on the sales side.
Fourthly, rethinking the business model because investment in back and middle office technology was enormously expensive. Partnerships and outsourcing could provide solutions, leaving asset managers to concentrate on their core tasks of managing money, clients, and risk, BCG said.
