Dark days for asset managers

The Boston Consulting Group’s (BCG) Conquering the Crisis: Global Asset Management 2009 report outlines how the sharp decline in professionally managed assets in 2008 has not only lowered profits for asset managers but led to questions about their judgment by investors.

The average operating margin of asset managers fell to 34% of net revenues at the end of 2008 from 38% in 2007, a 5-year low. The current year looks even worse, with average operating margins likely falling to 30% or lower. Overall, the report states, about 80% of asset managers suffered profit declines in 2008, while about 70% witnessed revenue decreases as well.

Loss of face
Their standing in the minds of investors is even worse. The damage to asset managers’ reputations is more severe than after the dot-com bubble fiasco at the turn of the millennium as more investors have been hurt across a diverse set of asset classes. In the future, the report’s authors predict that institutional investors will demand more product transparency and will shun higher fees for actively managed products with returns similar to those of passively managed products. Add to the mix some zealous regulatory oversight, and you have an immediate future that is likely to be less than pleasant for many managers.

The report describes three possible scenarios for the future, titled: Armageddon, Recovery, and Happier Days. The foremost element that influences these scenarios will be the state of financial markets, as well as the evolving health of the overall financial-services sector and the changing regulatory climate.

BCG says that the following industry trends will remain important for some time to come:

The re-evaluation of products
As asset allocation goes, money market funds have been the winners since the crisis began, with more than $1.5 trillion in net inflows from the beginning of 2007 through 2008, followed by exchange-traded funds and savings deposits. In the near future, BCG predicts:

• a continuing decline of long-only equity products as investors review their risk-versus-return profile;
• growth in fixed-income products, as pension funds move assets into less volatile securities with the retirement of baby boomers; an increasing shift into passively managed products; and
• a shakeout in alternative products (which will nonetheless remain an important asset class as investors seek diversification); and increased interest in tailored investment solutions.

Consolidation
A higher degree of industry consolidation is to be expected as more large financial groups exit the asset management business in order to focus on other activities, and because many need capital. Also, today’s hypercompetitive market will force subscale players or those with weaker value propositions to leave the business. This situation will allow some asset managers to consider M&A options in order to reinforce core businesses or move into markets that were previously seen as too expensive or closed.

Industrialization
Some M&A activity will be driven by “industrialization logic”, according to the report, as more asset managers create “factories” for their traditional range of funds in order to gain scale advantages. Some of the recent, large consolidation deals have shown that traditional scaleable businesses tend to become industrialized.

Many asset managers are attempting to protect their business and position themselves for the post-crisis era, but there is no proof the downturn is over. BCG suggests asset managers adopt the following initiatives:

• Prepare for the worst possible market scenario;
• Redefine the core value proposition of their business models;
• Strengthen their core value propositions;
• Continuously refine their operating models;
• Leverage acquisition opportunities;

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