As central banks tighten their monetary policies with higher interest rates and rising regulation, asset managers are facing a challenge to their profitability.
That’s the stark warning of a new report that says firms must define their strategies or risk going out of business.
Management consultancy Bain & Co says that annual growth of assets under management will almost halve from 7% in the 2012-2017 period to 4% in 2018-2022.
That will of course hit profits per asset, forecast to drop 7% in the 2018-2022 period.
“Asset management firms have benefited from the post-crisis easy money boom, growing wealth especially in emerging markets and rising stock markets. But we expect changes on the horizon, resulting in a tougher environment for these firms,” said Matthias Memminger, a partner at Bain & Company in Frankfurt and the lead author of the study. “Not all firms will survive, and those that do will need to work harder to be profitable.”
Asset managers quest for tech
The decline in profitability is driving demand for technology among asset managers with the potential to boost efficiency while offering additional products to clients.
However, Bain & Co warns that even investing in technology may not save weaker firms while the stronger players will seize a growing share of the market to drive profits.
The report says that small and mid-size “vanilla” firms with no competitive advantage are most at risk of failing; and this represents around half of firms globally.
Larger firms with a few distinctive characteristics are more likely to survive.
Protecting the business means having a plan
There are things that asset managers can do to better protect themselves from the changing environment.
The report says that there are ways to escape the ‘valley of death’:
- Go big, with two possible variations: Large-scale companies such as BlackRock and Vanguard have spread their costs over a broad, predominantly passive asset base to achieve a strong scale position. Some firms, including Amundi and Fidelity, pursue mainly active investment strategies and offer a broad range of products.
- Develop highly differentiated offerings that can justify the premium fees customers are willing to pay over time. Of late, the majority of institutional money has flowed to asset managers delivering high alpha. Such managers tend to carve out a niche focusing on a specific asset class, product, portfolio strategy or customer segment; examples include Zurich-based RobecoSAM, Nordea Asset Management of Sweden and boutique endowment funds in the US.
“Now is the time for asset management firms to really drill down and differentiate themselves,” said Mike Kuehnel, a partner at Bain & Company in Frankfurt and a co-author of the study. “There are different strategies that lead to success but they key is defining which one you want to pursue and making sure you have the right people and tools in place to implement it.”
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