Market-driven growth is likely a thing of the past for the global asset management industry, says a new report. Looking ahead, fund managers are going to have to drive their own growth by pursuing a well-defined strategy, and making greater use of advanced data and technology, it says.
The report, from Boston Consulting group (BCG), indicates that global growth in assets under management (AUM) stalled in 2015. Indeed, global AUM was essentially flat at US$71.4 trillion, the report says. This amount was up about 1% from the previous year, but down from an average annualized rate of 5% from 2008 through 2014.
“The lack of growth was due largely to continued tepid net flows and the generally negative and turbulent performance of global financial markets, which failed to buoy the value of invested assets as in prior years,” the report says; adding that the strong U.S. dollar also reduced asset values in dollar terms.
BCG reports that net new flows came in at 1.5% of prior-year AUM, which is in the same range as the three previous years. “The results underscored the continuing dependence of many managers on rising financial markets to boost their AUM, rather than on long-term competitive advantage to attract net new flows,” it says.
Amid this tepid growth, global profits also rose just 1% to reach US$100 billion, the firm says; and, margins declined from 28.9 basis points in 2013 to 27.7 bps in 2015.
“Notably, the net decline in revenue margins in 2015 was not the result of shifts in product mix, which historically have been the main source of decline,” it says. “Now, however, margin compression resulted from strong pressure on fees, which was particularly acute for most traditional asset managers.”
The report says that the industry’s weak results in 2015 “provided fresh evidence that the industry’s business models are increasingly susceptible to long-term trends — a vulnerability that has been masked by the high profits earned by the industry and the historically strong growth of assets generated by strong capital markets globally.”
Looking ahead, BCG says that firms will have to use advanced data, analytics, and technology such as machine learning, artificial intelligence, natural-language processing, and predictive reasoning, in order to develop a sustainable competitive advantage.
“Today’s managers face a fundamental and indisputable need to support their investment processes by developing increasingly advanced capabilities in these digital technologies. The alternative, for most firms, is to risk becoming irrelevant and trailing others in the ability to generate superior investment returns,” it says.
“Armed with these cutting-edge techniques, asset managers have the potential to gain a significant information arbitrage advantage over their peers and are positioned to understand, monitor, and fend off the growing array of risks that confront managers, their clients, and the global financial system,” it says. The report also notes that a comprehensive approach to risk management is crucial.
The report also says that it believes that the four business models that are best positioned for success in the future include firms that demonstrate a superior ability to generate alpha; large, efficient “beta factories”; firms that provide solutions such as multi-asset class portfolio construction, asset allocation, manager selection, and monitoring; and, finally firms with a distribution advantage.
“Asset managers must evaluate where they fit into this framework and determine which model is best suited to supporting their success,” it says. “Their capability-building efforts and investments should be aligned with their target model. For some, this may require a material change in mindset, culture, and approach.”
Photo copyright: rabbit/123RF