Asset management firms with more than $500bn in assets under management (AUM), but less than $2trn, are suffering from the biggest margin squeeze compared with their peers, according to research from Exante.
The firm’s asset management outlook, which looks at risks and opportunities facing asset managers over the next decade, found there was a “valley of death” for asset managers of a certain size.
Using data from Oliver Wyman, it noted fund managers with more than $2trn of AUM have average profit margins of 45%, while those with less than $500bn have 36% margins. However, those in the middle have average margins of just 26%.
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Exante attributed this to middle-sized management firms competing “in the same way as the largest management firms”.
The report stated: “They are too diverse and often too large to benefit from simpler operating models, but not large enough to operate at scale. They cannot easily acquire competitors and therefore may have to become more focused asset or sector specialists.”
Exante added that “if an asset manager cannot achieve scale, specialisation is often preferable”.
It cited research from McKinsey, which found that specialist buyout funds achieved average pooled internal rates of return – the estimated annualised rate of growth – of 17% compared with their generalist counterparts at 13%.
Structual headwinds
While AUM are growing, with the industry reaching a record $128trn in 2024 – marking a 12% uptick – it is becoming increasingly concentrated among the largest firms.
According to research from Moody’s, the 20 largest asset managers controlled 47% of all AUM during the same year.
The increase in passive products and increasing cost-awareness from investors isn’t helping the disparity, according to Exante.
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Using Morningstar data, it found passive funds charge up to 60% less than their actively-managed counterparts which, when combined with mounting compliance costs, means “margins are severely compressed”.
“The industry faces structural fee compression due to the rise of passive strategies and increasing compliance costs,” the report stated. “Profitability per AUM is down significantly.
“Firms are responding by shifting focus from pure beta to specialised, high-conviction alpha, leveraging AI for personalisation, and transforming product lines from mutual funds to active ETFs.”
The report referred to research from Deloitte, which found firms have transitioned more than $60bn in assets so far from mutual funds to ETFs.
Exante added the rise of passives has also been fuelled by the relative underperformance of active managers over the long term.
“Asset managers must shift from a focus on pure beta to providing specialised, high-conviction alpha, leveraging AI to improve portfolio personalisation,” the report said. “A strategic divergence is emerging between large diversified platforms aiming for scale and highly specialised boutiques.”
