The global asset management industry, which faced a decline in assets under management in 2022, has “reached a turning point” in its fortunes and will need to transform to return to the growth of past years.
This is the conclusion of a report on the industry (including the industry in South Africa) released last week by the global management consultancy Boston Consulting Group, titled “The tide has turned”.
It shows that 2022 was one of the worst years for investors since 2008, the year of the global financial crisis. Globally, assets under management dropped by 10% to $98 trillion (R1807 trillion). South Africa was among the losers, dropping 5% to $190 billion.
Market volatility related to a surge in inflation and the end of the “easy money” era that began with the 2008 crisis is largely to blame for the drop in the value of investors’ assets and a concomitant drop in profitability for asset management firms. But the report also identifies other pressures facing the industry.
On the release of the report, Arjan-Tim Ferweda, a partner at Boston Consulting Group in Johannesburg, said: “The asset management industry has reached a turning point, requiring leaders to rethink the way their organisations operate if they want to return to the profit growth of years past.
“Global, regional and local markets are full of economic uncertainties, and technology is rapidly transforming the way financial services firms serve their clients. South African asset managers will need to embrace new ways to approach profitability, expanding into high-growth private markets and offering personalised products and services to meet investor demands and drive growth in a complex and pressured environment.”
The report lists the following five main pressures for the industry:
Market performance. The report reveals that 90% of revenue growth since 2006 has come from market performance. But this is likely to be significantly less in the future, possibly up to half that of the past decade.
Passively managed funds. These low-cost index-tracking funds are becoming increasingly popular worldwide, although South Africa’s asset management market continues to be dominated by active managers.
Declining asset management fees. Increased competition in the asset management market is driving investment fees down. This is partially due to the uptick in lower-priced passive products but also because of an increasingly overcrowded active space.
Costs are rising. The rise in assets under management in a rising market masked the higher costs the industry is facing. However, from 2015 onward, costs as a share of revenue have increased – with the vast majority of costs related to personnel. “Asset managers will need to reduce their costs by at least 20% to maintain historical levels of profitability,” the report says.
The current approach to product innovation is not working. Although asset managers have created “an abundance of products to stand out in a competitive playing field, proliferation has not translated into meaningful innovation”, the report says.
Investors are choosing established products with reliable track records: 75% of assets under management in mutual funds (known in South Africa as unit trust funds) and exchange-traded funds (ETFs) sit in products which are at least 10 years old.
The report outlines three major themes that asset managers need to consider to thrive in the years ahead:
Profitability: Firms should “transform their approach to profitability by using multiple initiatives to optimise costs, rather than just slash expenses”.
Alternative investments. One region of opportunity, the report suggests, is alternative investments, including hedge funds and private debt and equity. “Alternatives represented more than $20 trillion of global assets under management at the end of 2022 and accounted for half of the industry’s global revenues, generating more than $190 billion for the firms that offer them. This strong momentum is expected to prevail with an annual growth rate of 7% in alternative assets over the next five years,” the BCG report says.
Personalisation. Asset managers need to harness technology to create more personalised products for clients and to improve their experiences and outcomes.
“It is more important than ever for asset managers in South Africa to transform and build more innovative organisations – but the good news is that the path to transformation is clear and imminently achievable for most. Those who act now are the ones most likely to survive and thrive in the decade ahead,” Ferweda said.
BUSINESS REPORT