Global Asset Management 2019: Will These ’20s Roar?

The global asset management industry has reached a tipping point. In 2018, after roughly a decade of positive momentum, the industry hit a wall—as was sure to happen sooner or later—amid concerns over rising interest rates and a turn in the economic cycle. Major asset markets posted negative returns, and managers saw outflows, leading in some cases to job cuts. Profitability declined and revenue margins contracted. Still, the picture was not entirely gloomy. Operating margins that averaged 35% were nothing to sneeze at; and after a horrible final quarter, markets bounced back in the first half of 2019. For that reason, many firms are not so much viewing the recent past with regret as thinking ahead and considering how to plan for the future.

As we look toward the 2020s, we expect to encounter more market volatility, competition, and economic uncertainty. But we also see oppor­tunities as the asset management industry evolves and as technology moves to center stage. So which trends and dynamics will ultimately prevail? Will these ’20s roar for asset managers or not?

Among the key trends that we expect to see dominating the next few years are these:

• Active management will have to continue to make its case against passive solutions and alternatives (especially private assets). Fee erosion is likely to persist in any event.
• Technology will effectively be table stakes in most markets. Getting it right will require a new strategic agenda and, usually, significant investment. We expect most firms to step up their digitization activities, leading to reimagined business models, new technology capabilities, greatly increased efficiency, and transformed client relationships.
• China will become the second-largest region for asset management, ahead of continental Europe, attracting more flows than the US over the next decade. Emerging markets will become more important.
• The winner-takes-all phenomenon we discussed in our Q1 review will accelerate as brand recognition, distribution dominance, and scale become ever more critical.
• Sustainable investing will rise as firms weave environmental, social, and governance (ESG) factors into their investment decisions, aiming to create positive impact without undermining returns.

The short-term priority for many asset managers will be to restore the positive momentum that lapsed in 2018. The value of assets under management (AuM) fell by 4% globally in 2018, to $74.3 trillion from $77.3 trillion. This was the first significant year-over-year decline since the crisis year of 2008, and it reversed some of the benefit of 2017, when AuM increased by 12%. Net new asset flows—the increase that is attributable to new money coming into asset management firms, minus outflows—amounted to $944 billion. That was sharply below the 2017 figure of $2.15 trillion in net new asset flows. Nevertheless, the asset flow decline mostly amounted to a reversion to the mean ­after a record-setting 2017.

The biggest decline in AuM took place in North America, where $2 trillion in value evaporated over the course of the year, accounting for two-thirds of the global loss in value. North American asset managers saw their 13% AuM gain in 2017 turn into a 5% decline in 2018—an 18-percentage-point swing.

Active products continued to struggle in 2018, as actively managed core assets lost $1 trillion in AuM. This was not exclusively a function of poor returns in equity and bond markets; it was the result of a secular trend. Over the past 15 years, active core assets have declined significantly in popularity. They now account for just $1 out of every $3 of AuM, versus more than $1 out of every $2 of AuM in 2003. Although a lot of the money that has flowed out of active has flowed into passive, this has benefited only a handful of asset managers.

Alternatives—a category that includes hedge funds, private equity, real estate, and other holdings—were the strongest asset class in 2018.

A critical consideration going forward is that managers will have a hard time prospering if they don’t make step changes in their use of technology. Businesses across the industry view data and analytics as a route to sharper decision making, lower costs, and turbocharged performance. We see particularly strong potential in investment management and distribution—areas where firms are lacking in technological capabilities. The problem is the high degree of uncertainty regarding the way forward.

In this 17th annual BCG report on the global asset management industry, we show that only a few firms are genuinely committed to the data and analytics opportunity. We believe that 20% to 30% of asset managers qualify as pioneers, meaning that they are investing in data and analytics with conviction across a broad range of use cases. Pioneers employ analytics products across the firm and accelerate technology adoption. Many are on their way to building mature data and analytics organizations, though most have not yet reached their destination.

The rest still have some distance to travel. The success of their transition is likely to depend on their ability to identify the data and technology that suits them best, to attract and retain necessary talent, and to ensure that their existing workforce remains on board and can acquire the necessary skills. Among the ingredients that are essential to achieving these aims are strong leadership, a systematic approach to developing and scaling use cases, and a robust attitude toward technology renewal. Firms that embrace these elements can make significant progress in six to nine months.

Looking ahead, we expect to see an increasingly binary formula for success. The first option comprises boutique alpha shops—small, focused, nimble businesses that can achieve alpha by using capacity-constrained strategies. The second option lies at the opposite end of the scale: distribution powerhouses with more than $1 trillion in AuM that offer a full spectrum of products. We have doubts about the ability of firms in the middle to reinvent themselves to the degree necessary to create sustainable business models. All of them will have to evolve significantly to be successful, and some will not make it to 2030. There is also a wild card: the role of tech giants. If the likes of Amazon and Google step up, as their peers in China are starting to do, the disruption will be rapid and powerful.

Of course, there are nuances to consider. In an industry comprising thousands of players globally and hundreds of billions of dollars in revenues, some firms will find room to carve out their own niches. Moreover, success factors may differ across geographies and demographics. Nevertheless, the decisions that asset managers make now—and the capabilities that they develop—are likely to play a vital role in driving performance over the coming decade. And the passage of these years will reveal whether “The Roaring ’20s” will take on a new meaning for asset managers.