Structural Shifts in the Asset Management Industry

There were many fall outs of the unprecedented US housing market collapse and Credit Crisis of 2008 – liquidity crunch, economic recession, closure of century old financial institutions, job losses of 8.8 million between 2007 to 2009 (source Bureau of Labor Statistics.  Job losses in 2008 of 2.6 million or the highest level in more than six decades (source::CNN Moneyhttp://money.cnn.com/2009/01/09/news/economy/jobs_december), rapid erosion of investor’s wealth.   One of the biggest fall outs of the Credit Crisis was erosion of investor’s confidence on professional Asset Management function.  The lingering effects of that can be witnessed in the key drivers of the Asset Management business – Net Flows; Active Assets Under Management (AuM); Fee Rate; and Growth rates of Active vs. Passive Products.

The Global Asset Management industry continues to witness mounting headwinds. Yes, the post crisis rebound of late 2009 and early 2010 gave the required boost to the operating margins.  However, three out of every four of Global Asset Managers agree that the industry is undergoing fundamental structural changes.

Key Challenges and Structural Shifts facing the Asset Management Industry

  • Flat AUM - Professionally Managed Assets remain flat at 2007 level ($58 trillion)
  • Declining Net Flows – Net flows averaged at 0.2% p.a. between 2008 and 2011 compared to an average of 4.7% during 2004 to 2007
  • Increasing trend of ‘In-Sourcing’ - An analysis of 50 global institutional investors shows that investors have brought ~$65 billion worth of AuM in-house in last 18 months
  • Rising Regulatory Management Cost – Operating margins will continue erode due to implementation of current and evolving regulatory requirements (Dodd Frank, FATCA, MiFid, etc.)
  • Growing significance of Emerging Markets - Allocation to emerging markets has doubled in the last six years.  Substantial diversity exists in political and business environments in Emerging Markets requiring strong local operational expertise to generate Alpha
  • Shifting investor preferences from ‘Active’ to ‘Passives’ and Alternatives - Actively managed professional assets are declining.  Passive Asset Management products grown five times as fast as ‘Actives’ in the last seven years (2004-2011). Allocation to Alternatives has been steadily growing since 2008.

A number of the above changes are structural and will have long term impact on the operating model of Investment Management firms.  We believe that winners of tomorrow will do a thorough reassessment of business models, customer acquisition and retention practices, operating capabilities and governance frameworks.

In the next post, I will discuss, what are the ‘best practices’ that some of the best in class companies are deploying.  Also, look forward to the future post on what could be the ‘next practices’ for the Asset Management industry – an industry in rapid change and transition.