Choppy capital markets and tepid growth in traditional asset classes are putting pressure on the global asset management industry not just today, but into the future, according to a report by the U.S. Institute and consulting firms McLagan and Casey, Quirk & Associates.
The study, Performance Intelligence: 2011 Survey Results , says that while operating margins have recovered from their 2009 lows, at a median 32% in 2011, they still remain below pre-crisis levels.
Moreover, how those margins are currently being managed may not be the best solution. According to the report, profit margins since the financial crisis have been managed by controlling compensation and benefits expense. However, keeping the lid on costs will not sustain current profit margins into the future. Instead, the report recommends that asset managers focus on growing revenues by maintaining the following five key characteristics:
- investment practices that include unique alpha skills, benchmark-tracking or multi-asset class solutions to clients;
- well-resourced sales and marketing teams;
- a technically skilled client interface;
- strong talent recruitment and retention; and
- operational independence and the ability to function as a best-practices investment manager.
Fred Bleakley, director of the U.S. Institute, said the findings should be a wake-up call to asset management firms. “While still highly profitable, the industry will be challenged as never before.’’
There is some good news, though. Alternatives and the expansion of professional money management in new markets will provide substantial growth opportunities for the industry. By 2016, alternatives—including hedge funds and funds of hedge funds, private equity, real estate and commodities—will represent 40% of total asset industry revenue and 17% of assets under management (AUM). By contrast, in 2000, alternatives generated 9% of industry revenue, and 3% of AUM.
As inflows slow from the historic North American, European and Japanese sources of investor growth, emerging markets in Latin America, Asia and the Middle East are expected to present asset managers with the best opportunities for new funds from institutional and retail investors.
“Though ingredients for past success are no longer sufficient in today’s environment, asset managers that adopt the critical future success characteristics we’ve outlined can succeed in growing revenue and maintaining strong profit margins,’’ said Jeb Doggett, partner at Casey Quirk.