Why the usual cost-cutting measures are no longer enough
A year of assets falling has finally taken its toll on global asset managers, who industry veterans predict will be forced to make some tough decisions this 2023.
In the 10 months after a year of record growth in 2021, total assets in mutual and exchange traded funds in the US plummeted by 17% according to the Investment Company Institute. Markets tumbled across nearly all asset classes and management fees followed suit. While asset managers responded with the usual – albeit painful – cost-cutting measures of downsizing their staff and bonuses, even these may no longer be enough in the next 12 months.
“There has been a lot of complacency,” said a partner at wealth and asset management consulting agency Bain, Markus Habbel, to the Financial Times. “A lot of players now really need to get their act together. If you don’t have scale, it is getting tougher.”
Oliver Wyman partner Julia Hobart agreed. “The temptation is to take a little bit off everything,” she was quoted as saying in the Times. “[But] in reality it doesn’t move the dial. Managers will need to decide what they will and won’t focus on. Big structural changes will need to be made….”
While those ‘without scale’ make the tough decisions, stronger players in the industry are leaping at the chance to secure their advantage.
“We continue to invest through the market cycle into long-running trends that are strategic priorities for us, including sustainable investing, alternatives, active management and exchange traded funds,” said JPMorgan Asset Management chief executive for Europe Patrick Thomson. “If you invest significantly into those trends through a downturn, it puts you at an advantage where others may have to cut back.”
Many asset managers are hoping bond funds – which suffered huge price drops and outflows in 2022 in response to rapid rate hikes –will start to recover in 2023. Others have placed their hopes on the market slump accelerating the shift from traditional brokerage accounts to new and emerging ways of investing, including ETFs and model portfolios, the Financial Times reported.
“Whenever there are super shocks in the market, people make big changes to their portfolios,” BlackRock’s incoming chief financial officer Martin Small told the newshub. “In US retail markets, there is a move from brokerage accounts to fee-based advisory. That means more model portfolios and more ETFs.”
Asset managers already invested considerable time and resources acquiring providers specializing in alternative investments and private markets in 2021. Since then, the deals have died down, with the S&P Composite 1500 Asset Managers index dropping by almost 25%.
But continued pressure costs may prove to be just the push some asset managers needs in the latter half of 2023. “Some players may conclude their business models are no longer sustainable and entertain more creative solutions for consolidation and M&A,” McKinsey’s head of European asset management Philipp Koch told the Financial Times. “Most asset managers were on the buyer side. That might change.”