Asset managers’ revenue may grow at only one per cent a year for the next five years, the latest report from Oliver Wyman and Morgan Stanley has warned.
The report entitled ‘Searching for Growth in an Age of Disruption’ also warns active managers that the revenue pool is set to shrink by around 9% annually under pressure from passive management shrinking by more than a third by 2023. Active managers will now be confronted with some very difficult choices about strategy.
The report says: “The growth in passive has commoditised access to market/benchmark returns. Until recently this trend was offset by growth in higher fee products at the aggressive end of the alpha spectrum, and strongly performing active managers could still expect good inflows as investors recycled mandates from weaker performers.
“This is changing. Investors are increasingly withdrawing allocations from active management altogether. While there are risks that stem from this shift to passive (including market concentration, liquidity, operational concerns and broader impact on market structure), the reality is that the premium charged for active asset management is falling steeply.”
Shrinking Revenues
Credible growth agenda
The report urges asset managers to set an ambitious but credible growth agenda that can help change perception and differentiate, allowing investors to reward those with growth prospects. But they are likely to have to come to terms with shrinking core active businesses due to the shrinking revenue pool.
Managers must “redefine and demonstrate the active proposition and be ready to compete at a lower price point”. It suggests that active managers should plan to take out 30% of core costs as this will be critical to fund growth and ensure survival. Indeed, the most aggressive active fund managers will have to invest 5 to 10% of revenues to continue to compete.
However cost cutting has not proved easy to date.
The report notes: “The asset management industry has the potential to cut up to 30% of its current cost base through a combination of improved automation, outsourcing and rationalization. The industry currently outsources less than 25% of its cost base but could increase this to as much as 50%. In fact, the industry still has a long way to go with costs still rising by 4% in 2018. This highlights the fact that, while many institutions are trying tactical steps to reduce costs, these are only marginal compared to what is required.”
Chart a course to Asia
The also urges managers to “chart a course for emerging Asia and private markets and solutions”. It predicts these businesses will grow to more than 50% of the global revenue pool in 5 years.
The report adds: “Regulatory driven change is pushing Asia to the fore, with onshore China driving 50% of emerging market client revenue growth. Private market AUM set to grow at 10% annually as the mix of public-to-private capital raising shifts and investors address under-allocation. The solutions sector will see asset managers leverage data technology advancement to create new value through redefining relationships with, and services to, investors.”
It also urges fund managers to examine greenfield builds as an alternative to traditional approaches to IT replacement, radically reducing the number of legacy systems.
The report which also covers wholesale banks also tells them to seek revenues in China to further embrace corporate clients and develop new solutions for investment banks.
Two strategic dilemmas for asset managers
1. how aggressively to defend the value of the core active business?
“As with other industries that have undergone dramatic pricing pressure, asset managers need to decide whether to stay and fight in traditional active or to move away. Delaying has been an option so far, but decisions are coming to a head.
“There are a number of steps active managers can take to defend the space including redefining the proposition around active ownership (e.g. taping into demands for shareholder stewardship); investing to help clients understand the risk in their portfolio; and reengineering both the cost base and fund delivery models to offer active management at a materially lower all-in, price. Not all will choose to invest, and we expect more consolidation in the core active market.”
2. Where to build capacity in the growth zones, and how to pursue these?
“Across each of the growth zones, there are different operating models that management need to choose between. For example: EM/China: Build distribution access vs. renting access through partnerships; l Private markets: Build, acquire or source the required investment capability from other partners; and l Solutions: Build or partner around client-facing technology – with a parallel challenge of building a transformative innovation culture alongside a traditional investment culture.”
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