The 'Great Reset' exposes gap in manager performance rankings

Recent analysis offers overview of how sector will fair in a volatile environment

The 'Great Reset' exposes gap in manager performance rankings

The asset management sector appears to have done extremely well during the past ten years, though that performance hasn’t exactly been even. At the end of 2021, North America emerged at the top of geographical rankings with the highest growth in revenues and assets under management, while revenues reached a record US$526 billion.

Even within the continent, individual firms' performances have differed greatly with an expanding gap between the "best and the rest," according to new research from McKinsey & Company.

Compared to gaps of 20 and 19 percentage points in 2019 and 2020, respectively, managers in the top quartile outperformed their colleagues in the lowest quartile by revenue by a margin of 29 percentage points in 2021.

The discrepancy in profitability between the top- and bottom-quartile performers was significantly greater, at 37 percentage points.

Read more: What growth strategies are top of mind for asset managers now?

The industry's expanding cost base can help to explain some of these discrepancies. Over the past ten years, asset managers' total costs have increased by US$71 billion in North America, or 73.9% from 2012 to the end of the previous year.

The research claims that with US$68 billion, investment management made up most of the total, followed by distribution costs (US$29 billion) and technology (US$21 billion).

“As investors have sought and asset managers have provided more complex solutions — product and vehicle innovation, usage of data and analytics, digital sales enablement, next-generation operating platforms — companies have [developed] a growing need for more, and more skilled, talent,” the report stated.

Compensation accounts for US$28 billion, or 39% of the industry's cost increases, with investment professionals' headcount accounting for roughly a third of that amount.

The industry’s growth over the past ten years has contributed significantly to the system's growing complexity, with management scrambling to seize more of that gain at the expense of obtaining operating leverage.

In keeping with the performance of 2021, the report indicated that almost 55% of active stock managers underperformed their benchmarks this year, with US$130 billion in outflows during the first half of 2022.

Seventy per cent of assets in fixed income underperformed throughout the same time, which presented another issue. Private markets were seen to have an advantage in the sustainability sector since managers were better able to secure clients through thematic strategies centered on decarbonization and energy transition.

Read more: Why private-market investments are well suited for ESG impact

A contrasting picture emerges from the public markets, though. The research issued a warning, predicting that soon, regulatory uncertainty will probably place a near-term road block in the overall prospects of sustainable investing.

According to the McKinsey report, “The Great Reset of 2022 has loosened some of the foundational assumptions behind several of the past decade’s defining trends, including the internationalization of products, clients, and capital sources.”

Based on the Great Reset, McKinsey outlined three possible futures for the sector: a "soft landing," in which central banks can control inflation; a "stagnation," in which there is a prolonged decline in economic growth; and "stagflation," in which inflation remains high and is exacerbated by ongoing geopolitical tensions.