The global asset management industry saw assets under management (AUM) drop by $10tn, to $98tn, in 2022, according to Boston Consulting Group’s (BCG’s) 21st annual global asset management industry report. This is the second-largest single-year decrease since 2005.
In addition, net flow rate also fell below 3% for the first time in five years, reaching 1.6% of total AUM, or $1.7tn, at the beginning of 2022, down from 4.4% in 2021.
The main drivers of this turnaround are faster-than-expected interest rate rises, reversal of accommodative central bank policies and market uncertainties.
The report, entitled ‘Global Asset Management 2023: The tide has turned’, estimates that, given the existing pressures and market expectations, if asset managers stay the course, their annual profit growth will be approximately half the industry average of recent years (5% versus 10%).
To get back to these levels, asset managers will need to cut costs by 20% overall and shift their revenue mix to generate at least 30% of their revenue from higher-margin products, such as alternative investments. These include hedge funds, private equity, real estate, infrastructure, commodities, private debt, and liquid alternative mutual funds.
The report identifies five pressures the industry is facing that shows the need for transformation:
- Growth is no longer guaranteed since market performance has been the main driver of revenues;
- Passive funds are increasingly popular;
- Fee compression is accelerating;
- Costs are rising;
- Fewer new products are surviving despite attempts at innovation.
BCG recommends prioritising three major themes that can help asset managers to thrive in the year ahead amid changing macroeconomics: profitability, private markets and personalisation.
First, to transform their approach to profitability, asset managers should examine the expenses and drivers in each function, and use multiple initiatives to optimise costs, rather than just slash expenses.
Second, firms should pursue high-growth alternative investments and private market opportunities. Those aiming to enter the alternatives market can do so through four primary pathways: build in-house; buy multiple firms and use an affiliate or boutique structure; buy an alternatives firm and operate it independently; or establish partnerships.
Third, asset managers should harness the technologies that make highly personalised client experiences and products possible. New technologies can boost personalisation efficiency and effectiveness in the sales and marketing process, potentially leading to an increase in sales conversions of about 20% relative to traditional approaches.
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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