Prediction: The Most Profitable Pockets of Asset Management

Falling fees and rising costs afflict firms worldwide. One research shop believes these niches are the exceptions.

Photo by Patricia Monteiro/Bloomberg

Photo by Patricia Monteiro/Bloomberg

Fee compression is squeezing asset managers’ profit margins — a trend that will continue “for the foreseeable future,” according to research firm Cerulli Associates. But some areas are better poised for growth over the next four years than others, the company argued in a new report on the global investment industry.

Cerulli sees opportunities for expansion in the retirement industries in China and Korea, as well as mid-size markets in Taiwan, Brazil, Mexico, and Chile. In retail investing, analysts projected fast — or greater than 10 percent — growth in China and Brazil, along with the smaller markets of India, Mexico, the Netherlands, and Chile.

Meanwhile, the U.S., Switzerland, Japan, Canada, and Spain were pinpointed as market laggards over the next four years. All but Switzerland also got a slow (sub-5 percent) growth rating for retail services, as did France, Germany, Italy, and Korea.

“Assets under management look set to continue growing for the foreseeable future, but so does pressure on profit margins, and increased regulation will add to costs,” Cerulli said in the report. “Global industry players will pay ever more attention to China, India, and Latin America.”

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Cerulli expects U.S. mutual funds to account for 59.1 percent of net mutual fund revenues in 2023 — down from 61.7 percent in 2018 and 64.1 percent in 2014. The research firm also predicted that European mutual funds would lose net revenue share, from 23.2 percent last year to 22.8 percent in 2023.

This lost market share is expected to go to fund firms in the Asia-Pacific region and Latin America. Asia-Pacific vehicles will deliver 12.8 percent of industry net revenues by 2023, the report wagered, up from 11.4 percent in 2018 and 9.7 percent in 2014. Meanwhile, analysts expect the fledgeling Latin American sector to reach 5.3 percent in 2023 from its 3.6 percent market share last year.

“In the U.S., sophisticated investors are increasingly focusing on fees, incentive alignment, and manager selection,” the report stated. “The country’s mutual funds and hedge funds have been hit the hardest by price compression, whereas advisory fees and private equity fees have mostly held steady.”

The research firm also forecasted a shift in assets under management away from equity funds into money market funds, balanced funds, and alternatives. Equity funds, which Cerulli said accounted for 40.5 percent of global industry assets under management last year, were projected to make up 39.2 percent of assets in 2023.

“Equity and bond funds will gradually lose market share to alternative and balanced funds over the next five years,” the report stated.

Another potential area of growth, according to Cerulli, is environmental, social, and governance investing.

“We are bullish on the long-term prospects of success when it comes to ESG integration and see shifting demographics and the impending intergenerational wealth transfer as causes for optimism,” Justina Deveikyte, associate director for European institutional research, said in a statement. “Investors under age 40 prefer strategies that incorporate ESG and many investment platforms are recording an increasing number of searches” for ESG-tilted products.