Global asset managers, despite overall positive trends in the value of the funds they manage, must take forceful initiatives to improve the integrity of their businesses if they hope to remain competitive as industry dynamics shift in step with demographic patterns, according to a new report by The Boston Consulting Group (BCG).
The new report, Playing the Long Game: Global Asset Management 2006, examines the current state of the industry, offers a detailed analysis of the market for retirement assets, and outlines specific actions that asset managers can take if they seek both to raise profitability and achieve a leadership position in the industry.
According to the report, which is based on a study of 28 national markets, the value of professionally managed assets -- those for which a management fee is paid -- grew by around 15 percent globally to $49.1 trillion in 2005, with capital inflows driven largely by growth in Europe and Asia. Assets under management (AuM) in both Europe and the Asia-Pacific region grew by more than 20 percent in nominal terms, compared with 9 percent in the United States. The U.S. market nonetheless remains the largest in the world, with more than $22 trillion in AuM.
BCG says that asset managers, in order to improve the integrity of their overall businesses, must optimize distribution networks, enhance segment and asset-class expertise, explore the development of innovative products, foster investment-manager autonomy, enhance scale, and continue to hammer away at cutting costs. A highly disciplined approach to distribution will be particularly critical because the bulk of power and influence in the industry is continuing to shift away from manufacturers toward distributors and intermediaries that control customer relationships. In order to improve competitiveness specifically in the market for retirement assets, players need to redefine their product portfolios, broaden advisory capacity, invest more in the customer experience, sharpen risk-management capabilities, and vigilantly keep up with regulatory shifts.
In analyzing the market for retirement assets, BCG says that the United States is the most attractive country for asset managers. The roughly 71 million American baby boomers in the 40-to-59 age bracket control an estimated $8.4 trillion, with the 60-to-69 age bracket (17 million strong) controlling an additional $4.2 trillion. The primary opportunity for U.S. asset managers is capturing funds as they shift from one type of investment to another, such as from corporate sponsored defined-contribution and defined-benefit plans into retail IRAs and annuities. The potential annual flow of such money in motion in the United States is about $1.5 trillion, the report says.
There is less opportunity for asset managers in Western European retirement markets, the report adds, because public policy reforms are proceeding slowly and reliance on state pension schemes remains high.
"This situation could change, however, if unit-linked investments and other vehicles that offer greater exposure to market risk become more popular," says Andy Maguire, lead author of the report and a BCG vice president and director based in London. "A number of governments have provided incentives for investors to try these products, but consumer resistance has remained high following sharp losses suffered by many investors in the postmillennium market downturn."
In other major markets such as Australia, Canada, and Japan, competition is highly concentrated among the top four or five players, the report says. The main opportunities lie in developing targeted sales forces and scalable platforms.
The report notes that traditional core businesses of actively managed equity, bond, and money market funds are coming under increasing pressure. Although revenue margins have showed relative stability since 2004 -- at around 45 to 50 basis points for equity funds and 15 to 20 basis points for bond and money market funds -- asset growth across the core is expected to stay in the middle single digits over the next few years. By contrast, asset growth should be stronger in noncore offerings. These include commoditized products such as index funds and exchange-traded funds, as well as alternative investments such as hedge funds and private equity. Hedge funds assets, which generate revenues in the 150-to-200 basis-point range, already exceed $1 trillion and are expected to grow by 15 percent annually as declining minimum- investment requirements bring hedge funds more into the asset management mainstream, the report says.
"Ultimately," says Andy Maguire, "the players that choose to be aggressive will need to make significant investments in areas that may be unfamiliar today. And those institutions that succeed will display the strongest ability to build and nurture relationships over the long term -- across the lifetime of today's clients and beyond."
