After four years of stalled growth, the $62 trillion global asset-management industry has finally entered a recovery stage, but it promises to be a bumpy one for traditional managers of the industry’s largest asset pools, according to a report by The Boston Consulting Group (BCG).
Total assets under management (AuM) and profits have nearly regained the levels both had reached before the financial crisis, according to BCG’s eleventh annual study of the worldwide asset-management industry, Capitalizing on the Recovery: Global Asset Management 2013. Global AuM rose to $62.4 trillion in 2012, surpassing the 2007 record of $57.2 trillion. Operating margins rose to 37 percent of net revenues and profit increased to $80 billion, although it remained roughly 15 percent below precrisis highs.
“While these results reflect a recovery, the industry’s AuM growth in 2012 was driven largely by the rise of global equity and fixed-income markets—which pushed up the value of securities underlying managers’ assets—rather than by net new asset flows,” said Markus Massi, Partner and Managing Director, BCG’s regional leader in Wholesale Banking and Capital Markets.
The increase in new asset flows remained relatively modest, totaling just 1.2 percent of global AuM in 2012. Most of those new flows moved to solutions, specialties, and passive asset classes rather than to the actively managed core assets of traditional players. A full quarter of traditional managers actually experienced significant erosion of their traditional actively managed core-asset base in 2012, despite the broad recovery of AuM.
“This ongoing structural shift has heightened questions about the future of traditional managers,” elaborated Massi. “Many asset managers enjoy substantial revenue streams from their existing assets, which often mask the urgency to confront existing structural changes as well as those yet to come.”
The study draws on a detailed benchmarking study BCG conducted in 2013 of more than 120 leading industry players managing a total $33 trillion, or 53 percent of global AuM. The report also reflects a comprehensive market-sizing effort covering 42 major markets representing more than 98 percent of the global asset-management business.
The report underlines that that the most successful managers are either specialists or traditional providers who have become “ambidextrous.” That is, they have maintained their active core-asset businesses while developing capabilities to capture new faster-growth assets, including solutions and specialties. While traditional players had their profits decrease by 2 percent a year since 2010, specialists and ambidextrous players saw their profits increase by 10 percent a year.
This trend is also evident in the GCC, where asset managers are enlarging their portfolios by offering more specialized products, like, for example, on commodities, real estate and hedge funds. However, some local players are still opting to sell third party products of renowned international product providers. Local asset managers still have to develop credible skills to retain these assets in the region and reap the benefits of higher margins.
Recovery Masks Divergent Rates of Regional Growth
BCG’s research revealed that the recovery masked widely divergent rates of AuM growth in 2012 among and within regions. Managers continue to confront a two-speed world in which the smaller, rapidly developing markets grow faster than the developed markets, with higher net flows. At the same time, AuM growth in the developed markets was significantly greater in absolute terms because of the dominant size of those markets.
Among the developed markets, one set of countries—including the U.S., Germany, the Netherlands, Australia, and South Korea—showed solid growth of 10 percent or more in AuM that was driven by both market impact and net flows. In contrast, Japan and some European countries—including France and Italy—registered high single-digit growth that was largely the result of rising markets.
AuM in Asia, excluding Japan and Australia, increased 17 percent in 2012. Japan and Australia grew 6 percent and 14 percent, respectively. Latin America achieved strong growth of 14 percent. In the Middle East and South Africa, AuM grew 12 percent.
“The 12 percent growth achieved by the Middle East and South Africa in 2012 is quite remarkable, given that these markets only expanded their AuM with 1 percent during 2011. The growth was driven by three main factors: a significant expansion of the Assets of GCC Sovereign Wealth Funds on the back of a global recovery; recovery of local equity markets, which led to higher portfolio valuations; and the fact that local and regional money has been invested in the GCC market, primarily in the UAE and Saudi Arabia” explained Massi.
U.S. Managers Take the Lead
U.S. managers have shown the most leadership and reaped the rewards, outperforming their European counterparts, the study found. While U.S. managers’ 2012 profits rose 10 percent above 2007 precrisis levels, European managers’ profits remained 31 percent below. U.S. players have used their specialty capabilities, product expertise, and international distribution to expand in Europe, where they continue to increase market share.
Overall, the industry’s traditional managers face a bumpy road of volatile markets, weakening of some revenue margins, and wide variations in performance among products and regions, according to the report. That helps explain why cost discipline has been an increasing focus since the crisis, especially for managers whose assets are eroding.
“The burning platform is clear for 25 percent of traditional managers who are experiencing strong outflows in active core assets. For the remaining traditional managers, the urgent need for change is obscured by strong revenues from the installed asset base, but investment in new higher-growth capabilities is no less critical” added Massi.
In order to afford investment in new capabilities, it is critical to tightly manage the cost structure. Conducting a thorough review of operations and IT functions, the report says, will guide managers to “efficiency’s next frontier.”
“Reviewing the operating model, with a focus on operations and IT, is a growing source of strategic advantage. Beyond boosting efficiency, a review can be the key to flexibility, scalability, and future growth,” concluded Massi.
A copy of the report can be downloaded at www.bcgperspectives.com.
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