By Pete Carvill
New research from Carne Group suggests that nearly two-thirds of asset management executives in Q3 2024 expect there to be a ‘significant increase’ to margin pressure over the next two years.
The findings come in the firm’s latest report, Supermodel: The Great Evolution in Asset Management, which also suggests that traditional managers are set to be hit harder, with 72% of executives expecting increased pressure compared to 56% of their counterparts at alternative firms.
Carne Group added that the market backdrop is also contributing to margin pressure, with 30% of asset managers expecting volatility in asset prices to weigh on margins in the coming two years; and 28% thinking investment performance challenges will be a key factor.
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The firm also pointed to a drive to integrate technology and the latest innovations, which is also set to eat into margins. Some 35% of asset managers have cited fixed costs relating to technology affecting their bottom line over this period. Notably, there is a divergence between traditional asset managers and alternative managers, 40% versus 28% respectively, indicating that the uptick in tech investment is going to be more burdensome for traditional managers.
John Donohoe, CEO of Carne Group, said: “The commercial pressures facing the asset management industry are set to heighten yet again in the coming two years. P&L for asset and wealth managers continues to come under more scrutiny. At the same time, we are seeing more CFOs take on the CEO roles as a result.”
He added: “This is driving a super silent evolution in outsourcing within the industry as firms look to drive efficiencies while trying to focus more of their spend on their growth agenda at the same time. As an example, nearly $2trn of the European funds market is outsourced to management companies – this is 50% more than five years ago. That is an exponential growth rate – and this is going to accelerate in the coming two years.”
Carne Group also pointed to what it said was downward pressure on fees, driven by the rise of passive investment and increased scrutiny by both clients and regulators on value, that was prompting significant challenges for traditional managers. Half (50%) of traditional asset managers cited the pressure to reduce fees as a key contributor to decreased profit margins in the near future.
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It also reported that actively-managed funds are facing greater pressure to reduce costs. Almost half (47%) of traditional managers expected to face increased pressure on profit margins across their suite of actively managed public funds, though it said that passive funds are not immune from this downward pressure, with 35% expecting increased pressure on passively managed public funds.
At an asset class level, managers think margin pressure will increase to a high extent for equity funds (51%) and bond funds (52%) over the next two years, as competition from passive products in these markets shows no signs of abating. Multi-asset funds (39%) are expected to suffer slightly less.
By comparison, just 29% expect a significant increase in margin pressure for private markets funds and hedge funds. As a result, the majority (79%) of traditional asset managers expect to undertake some level of product rationalisation, with actively managed funds in public markets (38%) the main target for this.
