2018 was a rough one for the asset management industry.
After a record-setting 2017, last year saw industry assets under management drop by $3 trillion — the “first significant year-over-year decline in global AUM since the crisis year of 2008,” according to a new report from Boston Consulting Group. Net asset flows totaled $944 billion, less than half of the $2.15 trillion recorded in 2017, BCG said.
The consulting firm’s annual industry report described last year’s sharp decline in net flows as “more in the nature of a reversion to the mean than a sign of trouble.” And 2019 so far has been “a very good year for market performance,” according to BCG managing director and partner Renaud Fages. Still, the fourth-quarter downturn left asset managers “slightly more prudent,” Fages said in an interview with Institutional Investor.
“I do think something has been broken in terms of how asset managers look at their business,” he said.
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Given the unrelenting pressure on fees, continued flows to passive strategies and private assets, and widening gap between technology leaders and laggards, BCG concluded that “strategies that set asset managers up for success in the past may not suffice in the future.”
As the consulting firm sees it, there will be two viable business models for asset managers in the decade to come: delivering “consistent, superior performance” as a boutique alpha shop, or succeeding through scale as a “distribution powerhouse” with more than $1 trillion in assets.
According to BCG, the small managers that thrive will boast top investment and research talent, effective sales and marketing departments, and “a pioneering use of data and analytics for investment purposes.” The largest firms will dominate thanks to their “superior” sales and marketing, advantaged access to intermediaries, “complete and dynamic” product lineup, and scalable technology and operating model.
“You could see where you have 10 to 15 very large players that dominate asset flow,” Fages said. “But there will always be room for the top-performing asset managers, whatever they look like… it’s hard to be a niche player at $1 trillion.”
But asset management firms which fall somewhere between a sub-$100 billion boutique and a trillion-dollar-plus giant will be “squeezed,” Fages said. “You have an incomplete lineup; you’re diluting your attention; and you don’t have the scale to invest in the business as much as the big guys.”
As a result of this squeeze, Fages said he expects to see “a lot more” mergers and acquisitions among mid-sized asset management firms, which will need scale to invest in technology and stave off fee pressure.
“Conditions are ripe for consolidation,” he said.