Asset Management Recovery Begins on Bumpy Road for Traditional Players

The Industry's Profits and Managed Assets Have Nearly Returned to Precrisis Levels, but Net New Flows Are Modest and Have Largely Shifted -- Along With Changing Investor Preferences -- to Nontraditional Players, BCG Report Says

NEW YORK, NY--(Marketwired - Jul 9, 2013) - After four years of stalled growth, the $62 trillion global asset-management industry has finally entered a recovery, but it promises to be a bumpy one for traditional managers of the industry's largest asset pools, according to a report released today 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, Global Asset Management 2013: Capitalizing on the Recovery. 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, the report says.

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, BCG's study found.

Likewise, 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, the report says.

"That ongoing structural shift has heightened questions about the future of traditional managers," said Gary Shub, a coauthor of the report and a BCG partner based in Boston. "Many asset managers enjoy substantial revenue streams from their existing assets, which often mask the urgency to confront structural changes already here as well as changes 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 most successful managers, the report says, 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 saw their profits decrease by 2 percent a year since 2010, specialists and ambidextrous players saw their profits increase by 10 percent a year.

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," said Andy Maguire, a London-based BCG senior partner and report coauthor. "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."

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," said Brent Beardsley, a coauthor and partner based in BCG's Chicago office, who is global leader of the firm's asset and wealth management segment. "Beyond boosting efficiency, a review can be the key to flexibility, scalability, and future growth."

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.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

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