THE COMING SHAKE-UP IN ASSET MANAGEMENT: DEFINE YOUR STRATEGY OR DISAPPEAR

New Bain & Company report finds that firms managing up to half of global assets under management could lose out to larger or more differentiated rivals as end of easy money saps profitability

London - 2 July, 2018- Asset managers may be riding a tide of rising wealth but challenges lurk beneath the surface. The end of the easy money boom coupled with increasing regulation will put a squeeze on profits. New research by Bain & Company finds that annual growth of assets under management (AUM) will slow from 7 percent in the 2012-2017 period to 4 percent in 2018-2022. In parallel, profitability will suffer: Bain & Company expects a sharp decline of 7 percent in profits per asset over 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.”

This decline in profitability has accelerated the demand for technology investments that will simultaneously offer new types of value-adding products and services to customers and increase process efficiency and scalability. Regardless of technology, however, weaker firms will find it harder to realize their desired price point or to keep a lid on cost per asset; stronger firms, meanwhile, will seize a growing share of the market and the profit pool.

Bain & Company estimates that the spread in profits between the top and bottom 10 companies will rise from 4 basis points (bps) in 2013 to 13 bps by 2022. In addition, the estimated €81 billion profit pool by 2022 will have flatlined compared with 2007, making it even more difficult for weaker firms to grow or even maintain share.

Asset management firms can plan ahead for these changes

In this less-forgiving environment, asset management firms will have to reassess their strategy. In particular, a collapse of plain-vanilla, smaller or midsized firms with no competitive advantage, which according to Bain & Company’s research, represents about half of global AUM, is a highly likely scenario. Captive midfield players relying on the distribution network of their parent bank or insurance company have kept their market share so far, but they are bound to lose under the new regulatory regime. Winning firms with a few distinctive characteristics will benefit disproportionally from the shift of assets away from the middle.

The collapse of the middle leaves firms with two viable strategic directions as a means of escape from this “valley of death.”

1. 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.
2. 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.

A few other companies, notably Natixis and Affiliated Managers Group, have built a strategically appealing business model that draws on both scale and differentiation. Their model consists of a portfolio of differentiated boutiques sharing one central client-facing platform.

“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.”

The research shows that moving in either direction requires taking stock of eight factors that contribute to success: products, value chain expansion, mergers and acquisitions (M&A), technology, operating models, employees, customers and distribution. Depending on their respective point of departure and direction of travel, asset managers will want to focus on excelling in at least three to five areas.

Editor’s Note: To request a copy of the report or schedule an interview with Matthias Memminger, Mike Kuehnel or Cyrosch Kalateh, please contact Aliza Medina at aliza.medina@bain.com or +44 207 969 6480.

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