Capturing Growth in Adverse Times: Global Asset … than 98 percent of the global asset-management...

Report

Capturing Growth in Adverse Times

Global Asset Management 2012

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Gary ShuB

BrenT BeardSley

hélène donnadieu

Kai Kramer

moniSh Kumar

andy maGuire

PhiliPPe morel

Tjun TanG

September 2012 | The Boston Consulting Group

Global Asset Management 2012

CApTurinG GrowTh in Adverse Times

2 | Capturing Growth in Adverse Times

ConTenTs

3 INTRODUCTION

4 A SNAPSHOT OF THE INDUSTRY Industry Growth Has StalledAn Eroding Share of Investable AssetsInvestors’ Preferences Continue to ShiftA Growing Demand for Solutions and SpecializationThe Gap Between Winners and Losers Is WideningDistributors Are Gaining PowerIndustry Economics Are Attractive but at RiskDeclining Prices Add to the Pressures on Revenue

16 WINNING IN THE NEW NORMALCapturing Growth Begins with Self-AssessmentEmerging WinnersStrategic ChoicesCapturing Unrealized Growth Potential

21 FOR FURTHER READING

22 NOTE TO THE READER

The Boston Consulting Group | 3

Global Asset Management 2012: Capturing Growth in Adverse Times is The Boston Consulting Group’s tenth annual worldwide study

of the asset management industry. The decade since our first report has seen steady growth in the breadth of BCG’s market-sizing research and benchmarking studies. The goals of the research, however, have remained steadfast: to provide an unbiased and critical assessment of the industry’s current trends and likely evolutionary path, and of the ways in which institutions might best navigate them.

This year’s findings portray, more starkly than ever, an industry in transition, competing internally and externally for an eroding share of the global pool of investor assets. This is the new normal for invest-ment managers, and for the foreseeable future it will define which business models and providers prosper and which ones fail.

Like its predecessors, this edition of our report reflects a comprehen-sive market-sizing effort. We covered 42 major markets (representing more than 98 percent of the global asset-management market) and focused exclusively on assets that are professionally managed for a fee. We also conducted a detailed analysis of the forces that are shap-ing the fortunes of asset management institutions around the globe.

In addition, this report contains conclusions drawn from a detailed benchmarking study of leading industry competitors—representing 48 percent of global assets under management (AuM)—that BCG con-ducted early in 2012. Our aim was to collect data on fees, products, distribution channels, and costs in order to gain insights into the cur-rent state of the industry and its underlying drivers of profitability.

inTroduCTion


A snApshoT of The indusTry

The asset management industry faces growing headwinds, despite a recent

rebound in profitability and growth. There are a number of key causes for concern:

The industry’s growth has stalled. • Managers failed in 2011 to attract substantial flows of net new assets, as they have failed to do every year since the financial crisis began in 2008. With the asset management market remaining at 2007 levels and the global pool of investable assets expand-ing, managers have lost market share.

Asset managers continue to confront a •two-speed world. AuM in developed markets has declined by 1 percent per year since 2007, while AuM in developing markets has experienced a compound annual growth rate (CAGR) of 7 percent.

The shift in investor preferences away from •traditional offerings continues. Actively managed core assets are declining as a percentage of total AuM, while passive, alternative, and specialty asset classes, as well as solutions, are growing.

The gap between winners and losers contin- •ues to grow. While a few providers have successfully adapted to the shift in investor preferences and are benefiting, most have failed to respond, losing assets as a result.

Wealth managers and distributors have •flexed their muscles and captured more of the value. Wealth managers have stepped into the solution developer role, leveraging their direct relationship with investors to capture a larger share of fees. Distributor power is expected to be further bolstered by regulations prohibiting payments by asset managers to distributors.

While the asset management industry remains profitable, its economics are at risk.

As a result of these trends, the economics of •the industry are at risk. While the asset management industry remains profitable, having rebounded from its 2009 low point, operating margins were essentially flat in 2011 and have not recovered to pre-2008 levels. Prices in certain seg-ments have declined, adding to longer-term revenue pressures caused by the shift to lower-cost passive and fixed-income products. At the same time, the regulatory environment has eroded the relative attractiveness of asset manage-ment businesses within broader finan-cial-services portfolios, especially com-pared with deposit-gathering businesses.


In short, on top of market and financial turmoil and a slow economic recovery, cyclical turbu-lence and fundamental structural shifts are buf-feting the industry, with potentially long-term consequences. This new-normal environment for investment managers will determine which business models and providers prosper and which ones fail in a winner-take-all world.

To assess the depth of these challenges, and to devise strategies for managers to navigate them, it is essential to better understand the macro trends and other forces that offer po-tential support for growth.

industry Growth has stalledSince 2007, the year before the crisis, the growth of the asset management industry, measured in terms of the global value of pro-fessionally managed assets, has essentially flatlined, reaching $58.3 trillion at year-end 2011, compared with $58.8 trillion in 2007.1 (See Exhibit 1.) Net new flows have varied from –0.5 to 1.0 percent since the crisis, com-pared with approximately 3 to 6 percent for many years prior. In 2011, net new flows measured a scant 0.1 percent.

A closer look at the data underscores two particular causes for concern in that poor

growth record, both of which warrant a de-tailed review:

Emerging markets are capturing a dispro- •portionately large share of the nominal growth, but the impact is relatively small in absolute terms.

There has been a significant decline in •the retail segment across most of the world’s mature markets over the past four years.

Decline in Developed Markets. Overall, managed assets in developed markets, representing about 90 percent of global AuM, have declined by 1 percent per year on average since the start of the crisis.2 At the same time, in developing markets, AuM has grown by 7 percent per year on average and now represents roughly 8 percent of global AuM, up from 6 percent in 2007.3 The growth potential in developing markets is partly driven by the increasing penetration of managed assets in relation to total financial assets. (See Exhibit 2.) Apart from a few coun-tries with very strong pension systems, such as Chile and Brazil, most emerging markets show low penetration of managed assets. Still, we can expect that as these countries’ GDP per capita rises, AuM will also grow.

5.7

AuM has been flat since the crisis andagain failed to grow in 2011

The industry has suffered a sharp dropin net new flows since 2007

Global AuM($trillions)

80

60

40

20

0201120102009200820072002 2010

−120112009200820072006200520042003

6

−0.2

4

2

00.1

1.0

−0.5

4.04.5

3.23.1

Average net flows(% of AuM at beginning of period)

CAGR

58.358.254.3

48.4

58.8

34.0

0%

12%

Sources: BCG Global Asset Management Market-Sizing Database, 2012; BCG Global Asset Management Benchmarking Database, 2012.

Exhibit 1 | The Asset Management Industry’s Growth Has Stalled at 2007 Levels


Analysis of global growth makes it clear that asset managers continue to navigate a two-speed world, with slow to no growth in ma-ture markets and more robust growth in many developing markets.4 (See Exhibit 3.) At the same time, examination by geograph-ic region reveals wide variations, with Asia

and Latin America making the largest contri-butions to global growth in AuM. (See Exhib-it 4.)

North America—which represented 48 •percent of global AuM at the end of 2011, with $27.7 trillion—registered essentially

Mexico

AuM penetration (% of total financial assets)26242220181614121086420

100,00080,00060,000Argentina GreeceIndonesia

TurkeyCzech Republic

Hungary

Russia

Poland

ThailandPortugal

Taiwan

Chile

Malaysia

SingaporeAustria

Ireland

Norway

Finland

BelgiumIndiaHong Kong

Denmark

Sweden

SpainSouth Korea

Switzerland

Brazil

China

Italy

AustraliaNetherlands

Canada

Germany

France

Japan

United Kingdom

UnitedStates

GDP per capita ($)20,000 40,000

Emerging markets with high GDP growth

South Africa

CAGR, 2002–2007 (%) CAGR, 2007–2010 (%) Growth, 2011 (%)

Latin America

North America Asia (excluding Japanand Australia)Europe Japan and

Australia

2011

27.7

2010

27.6

2007

28.8

2002

16.8

Assets under management, 2002–2011($trillions)

17.3

2002

11.1

2010

17.5

2007 2011

17.4

2002

3.1

2011

3.2

20102007

2.50.72011

5.8

2010

5.9

2007

6.6

2002

3.5

20070.3

2011

1.5

20101.31.0

2002 20101.1

20070.5

20111.11.1

+11−1 0

+9 +1 −1

+24 +12+12 +2+15 +1

+29 +5+7 –3–3+14

2002

The Middle East andSouth Africa

Sources: Economist Intelligence Unit; BCG Global Asset Management Market-Sizing Database, 2012; BCG analysis.Note: Offshore assets are not included in managed assets, affecting Hong Kong, Ireland, Singapore, Switzerland, and the U.K., in particular.

Source: BCG Global Asset Management Market-Sizing Database, 2012.Note: AuM totals represent assets, sourced from each region across 42 markets, that are professionally managed for a fee, including captive assets of insurance groups and pension funds delegated to asset managers with fees paid. Asset values for all currencies in all years are based on 2011 average U.S. dollar exchange rates to prevent currency swing distortions. The figures here do not directly correspond to those in our past annual reports owing to currency rate adjustments as well as to updated historical source data, methodology changes (in Australia, in particular), and the larger base of countries surveyed in 2011. Any apparent discrepancies in CAGRs are due to rounding.

Exhibit 2 | The Industry’s Penetration Varies Widely Across Global Markets

Exhibit 3 | Asset Managers Are Navigating a Two-Speed World


no growth overall in 2011 and has yet to regain its 2007 peak level of $28.8 trillion.

European AuM fell to $17.4 trillion in •2011, giving up half of the gain it made from 2007 to 2010, when AuM rose to $17.5 trillion from $17.3 trillion.

Southern Europe and France, in particular, •registered strong declines in 2011 owing to the hard-hit retail segment. Where growth was more robust, it skewed toward the institutional segment. For example, in the U.K. and the Netherlands, that segment grew by 5 percent and 9 percent, respec-tively.

Japan and Australia together accounted •for 10 percent of global AuM at the end of 2011, a decline of 3 percent and 2 percent, respectively; neither market has regained its precrisis level.

Asia (excluding Japan and Australia) •represented $3.2 trillion of global AuM at the end of 2011—an increase of 5 percent on average, although there were variations across countries. Indonesia, Malaysia, and China showed the strongest growth of more than 8 percent; in contrast, Taiwan, Hong Kong, Singapore, and India showed no growth, while South Korea and Thai-land grew modestly.

Latin America achieved strong growth of •12 percent in 2011, bringing AuM to $1.5 trillion. There were strong variations across countries, however. Chile registered no growth, while Brazil, Mexico, and Argentina all grew by at least 10 percent.

AuM in the Middle East and South Africa •grew by just 1 percent in 2011 (CAGR in both regions was 2 percent from 2007 to 2010.)

Decline in the Retail Segment. Globally, growth since 2007 has been fueled mainly by the institutional segment. Over the same period, the retail market has suffered, with asset managers failing to reconquer the hearts of investors. Instead, many retail investors have turned to investments per-ceived to be more transparent and less risky, such as bank deposits.

In developed markets, the institutional seg-ment has remained stable since 2007, with the decline in AuM driven mostly by the re-tail segment. However, in the U.S., Japan, Spain, Portugal, and Greece, both the retail and institutional segments have declined.

In developing markets, both the retail and in-stitutional segments have grown, with the lat-ter expanding more strongly. The persistent strength of the institutional market must be

Net growth in AuM by region

167

Latin America

540

Asia(excluding Japan

and Australia)

731

Net AuM growth,2007–2011 ($billions)2,000

1,500

1,000

500

0

−500

Globaltotal

−424North

America

−1,110

Japan andAustralia

−808

Rest ofthe world

56

WesternEurope

Source: BCG Global Asset Management Market-Sizing Database, 2012.

Exhibit 4 | Growth in AuM Varies Widely by Region


understood in context. First, this segment has benefited significantly from the positive market impact of declining interest rates over the past few years. But that trend is coming to an end. Second, institutional in-vestors’ growing need for higher perfor-mance to offset declining yields has been difficult for asset managers to meet. As a re-sult, managers’ share of the pension fund segment is at risk of eroding.

An eroding share of investable AssetsKey asset pools, including pension funds, in-surance companies, and private-household wealth, have collectively achieved a CAGR of 2 percent from year-end 2007 to 2011, when they reached $139 trillion.5 (See Exhibit 5.) The basic drivers of growth in these assets are similar across regions, but the magnitude of their impact on the asset management in-dustry varies.

First, global economic growth, which stagnat-ed following the 2008–2009 financial crisis, appears to be rebounding, if slowly and un-evenly. Second, the wave of workers ap-

proaching retirement is starting to crest, sup-porting an expansion of personal savings and investment. Finally, the recent poor perfor-mance of equity markets has delayed retire-ment for many, increasing the proportion of older and higher-income workers in the labor market.

Of the multiple factors contributing to asset managers’ loss of share of investor assets, some are cyclical while others are more sys-temic and fundamental. These may persist for at least the medium to long term and in-clude the following:

As investors lose faith in the industry, •there has been a flight to quality and to “risk free” assets, including government bonds and bank deposits insured by select governments.

Banks facing increased pressure to meet •balance-sheet and capital-ratio require-ments are making aggressive deposit- gathering efforts.

Institutional and retail investors are •searching for higher-yield options that

Assets managed professionallyfor a fee

Assets managed directlyby investors

2011

139.0

49.7

2007

127.7

49.7

Key investors’ asset pools ($trillions)

CAGR

7889.3

+2%

Sources: National statistical offices; OECD; Towers Watson; BCG Global Asset Management Market-Sizing Database, 2012; BCG analysis.Note: The total of $49.7 trillion in professionally managed assets shown here for 2011 does not include AuM by banks, corporations, governments, sovereign wealth funds, nonprofit entities, and offshore AuM that is part of the $58.3 trillion total AuM shown in Exhibit 1.

Exhibit 5 | As Key Investors’ Asset Pools Have Grown, AuM Has Remained Flat


asset managers have not been equipped to provide. On the retail side, an anecdotal but representative development is the rapid expansion of trust products in China, which reached RMB 4.8 trillion (roughly $750 billion) at the end of 2011, compared with RMB 0.6 trillion at the end of 2007. Asset managers participate in only about 10 percent of China’s trust market. On the institutional side, a growing number of large funds are investing directly in nontraditional private assets without asset manager involvement.

Greater scrutiny of costs at large pension and sovereign-wealth funds is driving increased in-sourcing of core strategies, and sometimes of specialties, by institutions at scale. For exam-ple, the California Public Employees Retire-ment System is in-sourcing wherever possible, managing 91 percent of its portfolio internally in 2011 while outsourcing currency overlay, in-stitutional fixed-income assets, and high-yield assets. Similarly, China’s CIC sovereign-wealth fund has gradually increased internal manage-ment in efficient and relatively well-developed markets while relying on external managers for the majority of its overseas investment

funds. And Norges Investment Bank, which manages Norway’s Government Pension Fund Global, reduced the share of externally man-aged assets by 50 percent, to 4.4 percent, in 2011 after ending 18 investment mandates. The bank explained that “external mandates are in segments where we see considerable po-tential for excess returns.”

investors’ preferences Continue to shiftChanges in investor preferences and persis-tently low interest rates have accelerated the demand for specialization and multiasset ca-pabilities. As a result, passive, alternative, and specialty products such as emerging- market asset classes, as well as solutions, con-tinue to grow. (See Exhibit 6.) Meanwhile, the traditional core—especially fixed-income products—is forecast to weaken further. (See Exhibit 7.)

Passive Products. • Overall, growth in exchange-traded funds (ETFs) has been remarkable, rising from $0.8 trillion at the end of 2007 to $1.3 trillion in 2011 despite the crisis—a CAGR of 14 percent.

2

13

9

22

Global AuM, by product

Alternatives4 (%)Passive/ETFs (%)

Solutions3 (%)Active specialties2 (%)

Active core1 (%)

2011

$58 trillion

13

12

24

49

2008

$48 trillion

2

54

2003

$39 trillion

87

21

631.4 2.8

5.19.2

14.1 8.0

CAGR (%)

269.6

21.4

14.21

Sources: ICI; Preqin; HFR; Strategic Insight; BlackRock ETF report; IMA; Arete; OECD; Towers Watson; P&I; Lippers/Reuters; BCG Global Asset Management Market-Sizing Database, 2012; BCG Global Asset Management Benchmarking Database, 2012.1Includes active-domestic, large-cap-equity, active-government fixed-income, money-market, and traditional balanced funds.2Includes equity specialties (foreign, global, emerging markets, and small- and mid-cap sectors) and fixed-income specialties (credit, emerging markets, global, high-yield, and convertibles).3Includes absolute-return, target-date, global-asset-allocation, flexible, income, and volatility funds.4Includes structured products, hedge funds, private equity, real estate, infrastructure, liability-driven investments, and commodity funds.

Exhibit 6 | Investor Preferences Are Shifting from Traditional Offerings to Passive, Specialty, and Alternative Products


If passive mandates are grouped with ETF assets, the penetration of passive products within the total asset-manage-ment market grew from 7 percent in 2003 to 12 percent in 2011.

Alternative Asset Classes. • The growth of alternatives has also been strong, espe-cially among institutions seeking greater diversification. For example, hedge funds reached $2.1 trillion in the first quarter of 2012, compared with $2.0 trillion at the end of 2011 and $1.9 trillion in 2010. Net inflows were $55 billion in 2010, $71 billion in 2011, and $16 billion in the first quarter of 2012. Other alternative prod-ucts also grew robustly. Commodities, for example, rose more than 15 percent yearly from 2007 through 2011. Demand is also growing for nonlisted alternative assets such as infrastructure and bank loans. Infrastructure assets, which grew more than 30 percent per year from 2007 through 2011, provide diversifi-cation, long-term income flows, and inflation protection. Pension funds have become willing investors while banks and insurance companies, especially in

Europe, are eager sellers of these assets in order to satisfy higher capital require-ments under new Basel III or Solvency II regulations. Bank loans and direct lending through funds are gaining momentum as banks deleverage and companies look for alternative financing. Nonlisted products are challenging for traditional asset managers, which often lack pricing capability and capacity. A few very large global players have invested in these capabilities, setting up large analytics teams, but most have not.

Fixed-Income Products. • This traditional stronghold of active managers and a source of recent solid growth is now under attack for several reasons. First, passive fixed-income investing is no longer considered irrelevant, pushing net sales of fixed-income ETFs above $38 billion in 2010 and $50 billion in 2011. This is expected to continue. Second, persistently low rates that are unlikely to fall further are expected to reduce the returns and attractiveness of fixed income as an asset class. Finally, the perceived risk-free, liquid character of government bonds has diminished, driving diversification and a

Passive products/ETFs

Alternative products

Traditionalactive products

Estimated size, 2011 ($trillions); scale = $1 trillion AlternativePassiveActive

Private equityRealestate

LDI Structured

Fixed-income ETFs

Equity ETFs

Passiveequity

SolutionsBalanced

Moneymarket

Passivefixed income

Fixed-income

core

Equityspecialties

Equitycore

100

Fixed-income specialties

500

Commodities

Infrastructure

Funds ofhedge funds

Hedge funds

Funds ofprivate-equity

funds0

−5

Net revenue margin1

(basis points)

200

CAGR, 2011–2015 (%)

25

20

15

10

5

Sources: ICI; Preqin; HFR; Strategic Insight; BlackRock ETF report; IMA; Arete; OECD; Towers Watson; P&I; Lippers/Reuters; BCG Global Asset Management Market-Sizing Database, 2012; BCG Global Asset Management Benchmarking Database, 2012.Note: LDI = liability-driven investment.1Management fees net of distribution costs.

Exhibit 7 | Traditional Actively Managed Asset Classes Are Forecast to Weaken Further


shift to specialized products like credit, high yield, and emerging-market debt, as well as to new types of private and noncorrelated assets such as infrastruc-ture and bank loans.

A Growing demand for solutions and specializationIn the retail segment, standalone funds are declining, while solution strategies—as well as global and emerging-market funds—grow. Since 2006 in the U.S., there have been three solutions among the top ten product strate-gies, as measured by mutual-fund net flows. In Europe, there have been three solutions among the top ten strategies since 2006. (See Exhibit 8.) The U.S. solutions were target-date-retirement, world-allocation, and world-bond funds; the Europe, they were target-maturity, mixed-flexible, and absolute-return funds.

By providing strategic asset allocation and di-versification across different (and always broader) asset classes, solutions address spe-cific investor needs—such as diversification, capital preservation, and guaranteed in-come—in highly volatile markets. Two types of solutions, in particular, have emerged:

Multiasset/Allocation Funds. • These funds, which include target-date-retirement, global-allocation, income, flexible, and absolute-return funds, have grown dramatically. In 2011, more than $750 billion of assets in the U.S.—3 percent of the total market—were held in these types of solutions, dominated by target-date funds in defined-contribution plans, compared with more than $350 billion at year-end 2008, or 1.8 percent of the total market. In the U.K., assets in multistrategy and asset allocation products increased by 29 percent from 2008 through 2011, to a total of roughly £122 billion, as those products’ total share of market AuM rose from 2.4 percent to 4.0 percent.

Managed Programs. • These funds, which include mutual-fund wraps, separately managed accounts, and model portfolios, held nearly $2 trillion in assets in 2011, or 15 to 20 percent of managed retail assets in the U.S. Wealth managers and advisors have established a very strong position in the managed-program market. In the U.S., they package and distribute the majority of these assets, enhancing their own power in the value chain and acting as gatekeepers to asset managers.

Top ten mutual-fund strategies in the U.S. Top ten mutual-fund strategies in Europe

Net inflows, 2011Cumulative net inflows,

20062011Cumulative net inflows,

20062011

Solutions Global and emerging-market funds-

186

$billions

Conservativeallocation 13

Bank loans 14

Emerging-marketbonds 15

Short-term bonds 15

Diversifiedemerging markets 19

High-yield bonds 21

World bonds 24

World allocation 25

Target dateretirement 40

Intermediate-termbonds 47

$billions

Guaranteed/protected 44

Commodities 46

Absolute return 55

60

High-yield bonds 64

Global bonds 67

Emerging-marketequity 77

Mixed flexible 86

Global equity 115

Money market

Emerging-marketbonds

High-yield bonds 71

World bonds 97

Large blend 106

Short-term bonds 116

World allocation 133

Foreign large blend 143

Diversified emergingmarkets 157

Target date retirement 252

Intermediate-termbonds 366

Money market,taxable 555

$billions

Net inflows, 2011

$billions

Asia-Pacificbonds 3

Mixed balanced 3

Other bonds 4

Commodities 4

6

6

Target maturity 7

High-yield bonds 7

U.S. bonds 7Global bonds 25

Global equity

Emerging-marketbonds

Sources: Strategic Insight; BCG analysis.

Exhibit 8 | The Top Product Strategies Reflect a Rise in Solutions and in Global and Emerging- Market Funds


In the institutional segment, too, investors’ demand for solutions is growing. At the same time, they are shifting from traditional asset-allocation approaches, driving the evolution of primary investment criteria.

A tough environment is drawing investors away from traditional asset classes.

A tough environment characterized by uncer-tainty and volatility has altered risk/return as-sumptions, drawing investors away from tradi-tional models and asset classes such as equity and fixed income. The shift from traditional benchmarks and the implementation of new asset-allocation approaches are now occurring at a deeper, portfolio level. These approaches continue to become more sophisticated and granular in the differentiation between alpha and beta funds in core strategies. Examples of this more nuanced approach include the in-creased use of risk-based allocation by large pension funds and the adoption of customized global benchmarks with regional mixes that are not aligned with current market caps. Like-wise, liability-driven investments have grown, and liquidity has gained importance as a key investment criterion, in contrast to the histori-cal focus on return targets and risk profiles. At the same time, midsize pension funds have ex-panded full outsourcing, including fiduciary management.

The Gap Between winners and Losers is wideningA few managers have responded effectively to the shift in investor preferences and have captured a disproportionate share of growth, winning nearly all the net flows into the mar-ket in recent years. But the majority of man-agers have not responded and have lost as-sets as a result.

The variability in players’ ability to attract net new money continues to increase. The winner-take-all phenomenon was still wide-spread in 2011, with only about 1 percent of funds capturing about $1 trillion of new mon-

ey. Excluding players that experienced net outflows, the top ten providers represented 54 percent and 44 percent of net sales of mu-tual funds domiciled in the U.S. and Europe, respectively. (See Exhibit 9.)

Winners typically have strong product exper-tise, allowing them to benefit from the spe-cialization trend. Of particular note is the strong success of U.S. and U.K. institutions ac-tive in Europe: five of the top ten players in Europe are U.S. companies, representing more than $70 billion in net inflows in a mar-ket that recorded $64 billion in net outflows overall. BCG’s benchmarking study revealed that 10 asset managers (all based in the U.S. or the U.K.) managed to increase their Euro-pean AuM by more than €5 billion in 2011, while 20 managers—mostly continental Euro-pean providers—suffered reductions in AuM totaling more than €5 billion.

distributors Are Gaining powerDistributors of investment products, such as wealth managers, have flexed their muscles and captured a larger share of industry reve-nue, primarily at the expense of asset manag-ers.

There are two key drivers of this shift in pow-er. The first is a variety of new and proposed regulatory measures in the U.S. and Europe. The rules aim to protect investors by increas-ing fee transparency and eliminating poten-tial biases in product selection among advi-sors, sometimes through a ban on third-party commissions. Second, the gatekeeper role played by distributors as providers of man-aged programs has relegated asset managers to the role of parts provider. Distributors own the investor relationship and typically make the decisions regarding program composition and manager selection. In this capacity, they are able to win a larger share of investment management fees, at the same time demand-ing lower fees in exchange for access to their programs by a larger number of investors.

industry economics Are Attractive but at riskThe asset management industry remains profitable—having recovered from its 2009


low point—but overall operating margins have remained flat since the crisis and have not rebounded to pre-2008 levels. In 2011, they rose modestly as net revenues grew by 4 percent and costs increased by 3 percent. (See Exhibit 10.)

Industry profits improved by 7 percent over-all in 2011, driven mostly by growth in aver-age AuM of 6 percent. At the same time, op-erating margins rose just slightly from those in 2010. (See Exhibit 11.)

Profitability growth varied widely among pro-viders: 56 percent improved their profits in absolute terms, driven mostly by revenue in-creases. Globally, 66 percent of players im-proved their revenues in 2011, while only 38 percent managed to cut their costs in absolute terms.

declining prices Add to the pressures on revenuePrices have declined recently in some seg-ments, adding to existing revenue pressures caused by the shift to lower-cost passive and fixed-income products. Revenue margins—or average fees in basis points for AuM—have remained significantly below precrisis levels for the past four years. We believe this trend

of lower prices and reduced revenue margins will continue.

Pressures on revenue are strong and are com-ing from many directions. Historically, these pressures were driven mostly by shifts in product mix—specifically, the larger share of fixed-income and passive products. Pricing of individual asset classes generally remained stable over time, except for some alternative and specialty asset classes that experienced downward pressure. In 2011, however, fee pressures surfaced in some segments, includ-ing third-party retail and captive retail. (See Exhibit 12.) An example of this occurred in the U.S., where distributors increased their share of gross revenues or fees at the expense of asset managers. We expect that this pres-sure will increase and affect third-party-retail asset managers everywhere as wealth manag-ers and distributors become more powerful in the rest of the world.

The expansion of managed programs has also eroded asset manager economics. Wrap fees used in these programs—typically total-ing 50 to 100 basis points—raise costs at the distributor level. Because of the need to con-tain the total fees paid by investors, that has increased pressure on the fees paid to man-agers of the underlying assets. In the new

Top Ten Providers, U.S. Top Ten Providers, Europe

Assetmanager

Net flows,2011

($billions)

Cumulativeshare of net

sales (%)

Cumulativeshare of

positive netsales (%)

BlackRock 21 Not applicable 9Franklin Templeton 21 Not applicable 18PIMCO 14 Not applicable 24BNY Mellon 9 Not applicable 28

M&G Investments 9 Not applicable 32

Standard Life 8 Not applicable 35Zürcher Kantonalbank 6 Not applicable 38Credit Suisse 5 Not applicable 40Investec 5 Not applicable 42Capital Group 5 Not applicable 44Total market −64

Five U.S. players in the top ten,compared with three in 2009

Vanguard 77 42 18BlackRock 37 63 28PIMCO 25 76 34JPMorgan Chase & Co. 17 85 38

DimensionalFund Advisors 16 94 42

DoubleLine Capital 12 101 45State Street 12 108 48T. Rowe Price 9 113 50New York Life 9 52Franklin Resources 9 123 54Total market 183

Assetmanager

Net flows,2011

($billions)

Cumulativeshare of net

sales (%)

Cumulativeshare of

positive netsales (%)

118

Sources: Strategic Insight; BCG analysis.Note: Money market excluded from this analysis; net flows for Europe converted from euros to dollars using 2011 average rate of $1.3926 to €1.

Exhibit 9 | A Few Providers Captured the Bulk of New Assets


Operating margins (% of net revenues)40

30

20

10

02011

34

2010

33.6

2009

28

2008

33

2007

37

2006

37

2005

37

2004

33

2003

26

Costs (basis points)

40

20

02011

30.7

2010

31.1

2009

29.2

2008

30.2

2007

36.5

2006

35.3

2005

32.8

2004

31.9

2003

30.3

Net revenues1 (basis points)

40

20

02011

20.3

2010

20.7

2009

21.1

2008

20.4

2007

23.0

2006

22.4

2005

20.8

2004

21.4

2003

22.6

Source: BCG Global Asset Management Benchmarking Database, 2012.1Management fees net of distribution costs.

Exhibit 11 | The Asset Management Industry Remains Profitable Despite Flat Operating Margins

+6%

End-of-year AuM Average AuM Net revenues1 Costs Profit

$trillions

60

40

20

02011

58.3

2010

58.2

2009

54.3

2008

48.4

2007

58.8

Index

100

80

60

40

20

02011

110

2010

104

2009

92

2008

96

2007

100Index

100

80

60

40

20

02011

92

2010

88

2009

74

2008

80

2007

100Index

100

80

60

40

20

0

+3%

2011

96

2010

93

2009

83

2008

86

2007

100Index

100

80

60

40

20

0

+7%

2011

85

2010

79

2009

55

2008

69

2007

100

1200%

+4%

Sources: BCG Global Asset Management Market-Sizing Database, 2012; BCG Global Asset Management Benchmarking Database, 2012.Note: Evolution of end-of-year AuM based on market-sizing analysis; evolution of average AuM, net revenues, costs, and profit based on our benchmarking sample. 1Management fees net of distribution costs.

Exhibit 10 | Increased Profit Margins in 2011 Were Largely Driven by AuM Growth


normal, investors are more willing to pay for asset-allocation, alpha-beta mix, or manager- selection services provided by managed- program providers than for actively managed assets of certain asset classes. Passive funds and ETFs also provide attractive, lower-fee al-ternatives to actively managed assets.

Regulatory changes and the scarcity of fund-ing have also diminished the industry’s at-tractiveness within the broader portfolio. In continental Europe, financial institutions pre-fer deposits that can funnel cash to bank bal-ance sheets over managed and structured products.

NOTES1. Asset values for all currencies in all years are based on 2011 average U.S. dollar exchange rates to prevent currency swing distortions. The figures here do not directly correspond to those in our past annual reports owing to currency rate adjustments as well as to updated historical source data, methodology changes (in Australia, in particular), and the larger base of countries surveyed in 2011.2. Developed markets include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, the United Kingdom, and the United States.3. Developing markets include Argentina, Brazil, Chile, China, the Czech Republic, Hungary, India, Indonesia, Malaysia, Mexico, the Middle East, Morocco, Poland, Russia, South Africa, Thailand, and Turkey.

4. AuM figures represent assets sourced from each region or country, not AuM managed or invested in each. Total AuM for developed and developing markets is less than 100 percent of global AuM because $1.5 trillion in offshore assets is counted separately.5. See Global Wealth 2012: The Battle to Regain Strength, BCG report, May 2012. Private-household wealth includes cash and deposits, money market funds, and listed securities held directly or indirectly through managed investments; it excludes investors’ own businesses, residences, and luxury goods.

Economics vary by segment

Net revenues by segment(basis points)

50403020100

Captive institutional 10

Third-party institutional 25

Captive retail 40

Third-party retail 50

60

Pricing pressures are on the rise

1−3 0−1−2

Captive retail

Average pricing, 2010–2011 (basis points)

Captive institutional −0.6

Third-party institutional 0.4

−0.2

Third-party retail −3.1

−4

Source: BCG Global Asset Management Benchmarking Database, 2012.

Exhibit 12 | Pricing Pressures Are Growing, Especially in Third-Party Retail


winninG in The new normAL

Turbulence across the asset manage-ment environment is driving profound

and abrupt shifts in the structure of the industry. While a number of positive macro trends support growth, the countervailing pressures on the industry are many, strong, and diverse. These include stalled growth, shifting investor demands, a growing diver-gence between winners and losers, increasing distribution power, and changing regulations, in addition to market volatility, persistent economic and rate uncertainty, and demo-graphic changes—all striking unevenly and with effects that are often difficult to forecast.

Asset managers must rethink their value proposition and all their offerings.

The net result is an industry in transition, competing internally and externally for an eroding share of the global pool of investor assets. For the foreseeable future, this is the environment that will define which business models and providers prosper and which ones fail.

Opportunities for growth in the new-normal environment vary widely by market and seg-ment. To craft a winning strategy, it is crucial

to differentiate accordingly. To be sure, asset managers face a common set of overarching challenges and at least one competitive man-date for success: they must focus relentlessly on understanding and addressing the real needs of investors, and they must be equipped to do so by constantly innovating, building capabilities, and bringing adapted solutions to the market.

Given their declining share of investable as-sets, managers must challenge themselves to rethink their value proposition and their com-plete set of offerings. They will have to ad-dress specific investor needs, including capi-tal preservation, guaranteed-income features, and broader asset-class diversification. Flex-ibility is imperative for providers that hope to stay abreast of market shifts. (See the sidebar, “The Flexibility Premium.”)

Capturing Growth Begins with self-AssessmentIn short, to reverse their eroding share of in-vestor assets and capture new flows, manag-ers will need to make clear-cut strategic choices informed by an honest assessment of their own starting point. Through our re-search and client work, we have identified some ways in which providers can position themselves to exploit growth opportunities on the basis of their target markets and exist-ing capabilities.


As a first step, managers should conduct an unbiased and comprehensive assessment of their capabilities in the context of the evolv-ing market and investor needs. At the same time, they should analyze and rank the rela-tive attractiveness of specific market opportu-nities.

As part of the self-assessment, managers should de-average their business by segment, product, and geography and evaluate their ca-pabilities and market opportunities in each segment-product-geography combination. Larger asset managers typically fail to recog-nize their lack of scale and advantage in spe-cific segment-product-geography combina-tions. Company-level scale generally provides limited benefits in the quest for growth.

Market opportunity is highly dependent on product choice—in particular, on whether the offering is active or passive. Currently in de-veloped markets, active products in core asset

classes are not attracting flows, except in the case of the strongest-performing funds and alternative and specialized asset classes—such as specialty fixed-income, global alloca-tion, and global equities. Developing markets offer more promising growth prospects for ac-tive products. In developed markets, passive products—typically long-only—are capturing more than 50 percent of all flows into domes-tic-equity and other core asset classes. Passive flows are also experiencing accelerating growth and penetration in emerging-equity and core fixed-income asset classes.

emerging winnersIn the new normal, emerging winners are of-ten larger managers that develop a broad spectrum of products that capture accumulat-ed benefits and capabilities from across multi-ple segment-product-geography combinations at scale. Benefits such as brand awareness and distribution enable these providers to ride out

In an environment of increased competi-tion and scarce opportunities, asset manag-ers must roll out new products and services and quickly adapt to new markets and client segments. But growing in all seg-ments and products increases complexity and can destroy profitability, even for large players with scale. Going forward, there will be a premium on strong management capable of developing business models that are both flexible and efficient.

Experience shows there is significant variation in players’ ability to balance traditional business efficiency with flexibil-ity and innovation. For instance, best- practice companies are able to differentiate service level by client segment on the basis of both current profit contribution and future growth potential. They are also able, in new-product development, to make timely and clear go/no-go operational and industrialization decisions based on product maturity. Straight-through process-ing in operations increasingly becomes a requirement for traditional products so

that added value from operations teams can support innovation and development in new markets.

To allocate resources appropriately across client segments, products, or markets, top management needs access to transparent and accurate profit analysis, which today is rarely available. A 2011 benchmarking survey of finance teams at European asset managers found no consistent approach to—or ability to conduct—cost allocation. Less than 50 percent of asset managers were able to measure front-office costs by product strategy or client segment, render-ing segment profitability analysis impos-sible. Only a few best-practice companies have managed to perform consistent, transparent, and deep profitability analysis across all key functions of their organiza-tion on a regular, decision-driving basis. Thus, managers that are able to master flexibility with discipline will gain a rare competitive advantage.

THE FLExIBILITy PREmIUm


market challenges to specific parts of their business or the entire enterprise. Emerging winners also include smaller managers with strong capabilities and offerings focused on just a few segment-product-geography combi-nations. There will always be space in the market for such providers, known for invest-ment management excellence.

Specialized products are particularly needed in the institutional segment.

Many asset managers fall into a third category of typically midsize providers. They are nei-ther big enough to realize accumulated bene-fits nor focused enough to achieve excellence in any one segment-product-geography combi-nation. These providers, particularly those in actively managed core-asset classes, need to rethink their source of comparative differenti-ation and redefine their strategic path.

strategic ChoicesIt is critical for asset managers to understand the implications of their strategic choices on a company’s business model and capabilities. Investment—perhaps even an acquisition—may be necessary to build those capabilities, whether they support a strategy based on product differentiation, specialized capabili-ties, or distribution expertise.

Differentiated Product Offerings. This strate-gic path can be supported in several ways, most notably through a strong performance record or rating. A strong record is critical in standalone active funds, in third-party retail, and in institutional channels. Managers must present clear, transparent, well-documented investment processes and a track record of consistent performance over time. Perfor-mance glitches are not necessarily an issue if they are explained and if countermeasures are taken.

Compelling product suites, including a robust pipeline with frequent new-product releases, also provide a means to successful product

differentiation—one that requires the ability to identify changing investor needs and cre-ate solutions accordingly. In both the retail and institutional segments, identifying those needs is no less critical for passive provid-ers—if they want to avoid displacement by third-party managers—than for active provid-ers. Compelling products are increasingly im-portant for captive-retail providers as captive markets—primarily located in continental Europe—move to more guided architecture. This is true even if the performance thresh-old is lower, as is the case at European retail banks, which are generally satisfied with their mostly affiliated offerings. Captive pro-viders should take advantage of preferred ac-cess to distribution networks and proximity to investors in order to better understand in-vestor needs.

Solutions, particularly those that meet retail investors’ needs in highly volatile markets, are another way of providing a differentiated product offering. Solutions must be compel-ling in order to succeed in the retail segment. They might deliver strategic asset allocation, capital preservation, guaranteed-income fea-tures, or diversification—the latter across dif-ferent and always broader asset classes. In re-tail markets, distribution of solutions can pose particular challenges to asset managers because wealth managers and investment ad-visors are often better positioned than asset managers to deliver solutions to investors. As a result, and as discussed in detail above, standalone fund providers are increasingly relegated to the role of parts provider. Asset managers with affiliated networks, however, have a potential advantage in this situation. They can more readily and rapidly identify investor needs and create adapted solutions by tapping the distribution network’s proxim-ity to the investor.

New and More Specialized Product Strate-gies. These offer a second potentially success-ful strategic path in the new-normal environ-ment. Specialized products are particularly needed in the institutional segment, where the uncertain and volatile environment has altered risk/return assumptions. As a result, investors have pulled back from traditional asset-allocation models and asset classes, such as equities, instead adopting new


models and noncorrelated asset classes like infrastructure and bank loans.

Capabilities that support specialized product strategies include strategic asset allocation, multiasset allocation, and pricing and other analytical expertise. These are just table stakes in many markets, but they still require familiarity and acumen with respect to multi-ple asset classes, even when these are exter-nally sourced. In addition, the winning asset classes tend to change yearly. (See Exhibit 13.)

Pricing and other analytical capabilities are now required in order to support new and nontraditional asset classes that are noncor-related, such as infrastructure and bank loans. Such assets are often privately traded and therefore require deep skills in pricing and due diligence. Value-added analytics also include new portfolio-management models and metrics such as liquidity that go beyond traditional measurements of performance and risk tolerance.

Distribution Expertise. This set of capabilities offers a third potentially successful path to growth. By providing best-practice, value-add-ed services to advisors—enhancing their productivity—managers can deliver a differ-entiated and compelling value proposition. This is a critical capability for active and passive providers, and it is increasingly important even in captive-retail markets with more open architecture, such as Germany and Italy. Distribution expertise typically requires a very well-coordinated interface between investment management and distribution teams.

Capturing unrealized Growth potentialAll asset managers—whether or not they need to shift strategic direction—should iden-tify and pursue unrealized potential for growth and profit improvement. They must look inside their existing business as well as outside of it to identify fresh opportunities.

Source: Datastream.Note: Asset classes above the red line in a given year achieved positive returns; those below the line had negative returns.

Exhibit 13 | Annual Top-Returning Assets: No Single Class Prevails 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

S&P 500

Com-mo-

dities

Com-mo-

ditiesreiTs

Com-mo-

dities

Small-cap

equityreiTs

Com-mo-

ditiesreiTs

Com-mo-

dities

Invest-ment-grade bonds

high yield reiTs


Non-U.S.

equity

Non-U.S.

equityreiTs Hedge

funds


Non-U.S.

equity

Non-U.S.

equity

Non-U.S.

equity

Non-U.S.

equity

Non-U.S.

equityHedge funds S&P 500

Small-cap

equityhigh yield


Small-cap

equity



Hedge funds reiTs

Small-cap

equityreiTs

Small-cap

equityHedge funds

high yield

Non-U.S.

equityhigh yield reiTs

Hedge funds

S&P 500

Hedge funds

high yield reiTs high

yieldCom-mo-

ditiesS&P 500

S&P 500


Small-cap

equity

Small-cap

equityS&P 500

S&P 500

high yield

Hedge funds

Small-cap

equity

Small-cap

equityhigh yield

S&P 500

high yield

Hedge funds

Hedge funds S&P 500 S&P 500 reiTs Hedge

fundsCom-mo-

dities

Small-cap

equityhigh yield

high yield

S&P 500

Non-U.S.

equity

Com-mo-

ditiesS&P 500

Small-cap

equityhigh yield

high yield reiTs Hedge

fundsCom-mo-

ditiesHedge funds

reiTsInvest-ment-grade bonds

S&P 500

Non-U.S.

equity

Small-cap

equityHedge funds

Hedge funds

high yield


Small-cap

equity

Non-U.S.

equity

Com-mo-

dities

Non-U.S.

equity

Small-cap

equity

Com-mo-

ditiesreiTs

Non-U.S.

equity

Com-mo-

ditiesS&P 500




Com-mo-

ditiesreiTs

Com-mo-

dities



Non-U.S.

equity

year

ly a

nnua

l ret

urn


One lever is to realize the full pricing poten-tial of the current business. This can be achieved by deploying more robust gover-nance of pricing decisions throughout the or-ganization and by upgrading consultative sell-ing capabilities in the field. Expansion into faster-growing markets is another potential lever for growth—depending on a careful re-view of the relative attractiveness of different markets and the probability of success given the available entry options.

Enhancing the business’s operating model to achieve the optimal balance between effi-ciency and effectiveness provides a third le-ver. Managers should consider improving their flexibility in order to support new-prod-uct introductions, new-market-entry efforts, or both. Outsourcing back-office and middle-office functions offers potential benefits in terms of efficiency and effectiveness, al-though most managers currently limit out-sourcing to traditional custody and fund ad-ministration.

There is no safe haven in the new nor-mal—no “right” to a fair share of asset

flows into the market. Strong performance is important to attract new money, along with the ability to understand investors and main-tain a robust set of offerings relevant to their changing needs. Institutions lacking these ta-ble stakes will face increasing difficulty sim-ply defending their existing assets, clients, and business.

Difficult and turbulent times demand strate-gic reinvention. Yet they also offer fresh op-portunities, as our research has revealed and as we have outlined above. The opportuni-ties, however, are not available to everyone— only to those asset managers willing to chal-lenge themselves, to rethink their value in the marketplace, and to innovate. Managers can begin by undertaking a fact-based reassess-ment of their strategic priorities, current models, and capability sets. That is the first step on the path to succeeding in a winner-take-all world.


for furTher reAdinG

The Boston Consulting Group has pub-lished other reports and articles that may be of interest to senior financial executives. Recent examples include those listed here.

How Banks Can Take the Lead in Mobile PaymentsAn article by The Boston Consulting Group, June 2012

The Battle to Regain Strength: Global Wealth 2012A report by The Boston Consulting Group, May 2012

Back to the Future: The BCG 2012 Investor SurveyAn article by The Boston Consulting Group, April 2012

Tough Decisions and New Directions: Global Capital Markets 2012A report by The Boston Consulting Group, April 2012

Customer-Centricity in Retail Banking A Focus by The Boston Consulting Group, March 2012

Digital Insurance: Charting a Course to Best-in-Class CapabilitiesAn article by The Boston Consulting Group, February 2012

A New Virtuous Cycle for Banks: Linking Social Media, Big Data, and Signal AdvantageAn article by The Boston Consulting Group, February 2012

Operational Excellence in Retail Banking: Raising Performance in Turbulent TimesA Focus by The Boston Consulting Group, February 2012

Transformation Amid Tough Times in the Insurance IndustryAn article by The Boston Consulting Group, February 2012

Facing New Realities in Global Banking: Risk Report 2011 A report by The Boston Consulting Group, December 2011

Global Aging: How Companies Can Adapt to the New Reality A report by The Boston Consulting Group, December 2011

Wealth Markets in China: Seeking the Opportunity to Lead—China Wealth 2011A report by The Boston Consulting Group and China Construction Bank, December 2011

Building on Success: Global Asset Management 2011A report by The Boston Consulting Group, July 2011

Shaping a New Tomorrow: Global Wealth 2011A report by The Boston Consulting Group, May 2011


noTe To The reAder

About the AuthorsGary Shub is a partner and managing director in the Boston office of The Boston Consulting Group and the global leader of the asset management topic. Brent Beardsley is a partner and managing director in the firm’s Chicago office and the leader of asset and wealth management in North America. Hélène Donnadieu is a principal in BCG’s Paris office and the global manager of asset management. Kai Kramer is a partner and managing director in the firm’s Frankfurt office. Monish Kumar is a senior partner and managing director in BCG’s New York office and the leader of the Financial Institutions practice in North America. Andy Maguire is a senior partner and managing director in the firm’s London office and the global leader of retail banking. Philippe Morel is a senior partner and managing director in BCG’s Paris office. Tjun Tang is a senior partner and managing director in the firm’s Hong Kong office and the leader of the Financial Institutions practice in Asia-Pacific.

AcknowledgmentsFirst and foremost, we would like to thank the asset management institu-tions that participated in our current and previous research and bench-marking efforts, as well as other orga-nizations that contributed to the in-sights contained in this report.

Within The Boston Consulting Group, our special thanks go to Anke Kip, Rutger-Jan Lange, Virginie Tachot, Francisco Martín Vázquez, and Andrea Walbaum. In addition, this report would not have been possible without the dedication of many members of BCG’s Financial Institutions practice, including Rafael Lopez Espinosa, Sagar Goel, Jayoon Kim, David Lalich, Hikari Marukawa, David Nazareth, Masahide Ohira, Cristina Rodríguez, Yiqi Wang, and Yasuhiro Yamai.

Finally, grateful thanks go to Jonathan Gage for his editorial direction, as well as to other members of the editorial and production team, including Katherine Andrews, Gary Callahan, Philip Crawford, Kim Friedman, Gina Goldstein, Sara Strassenreiter, Sharon Slodki, and Janice Willett.

For Further Contact If you would like to discuss your asset-management business with The Bos-ton Consulting Group, please contact one of the authors of this report.

The Americas Brent BeardsleyBCG Chicago+1 312 993 [email protected]

Monish KumarBCG New York+1 212 446 [email protected]

Gary ShubBCG Boston+1 617 973 [email protected]

EuropeHélène DonnadieuBCG Paris+33 1 40 17 10 [email protected]

Kai KramerBCG Frankfurt+49 69 9 15 02 [email protected]

Andy Maguire BCG London+44 207 753 [email protected]

Philippe MorelBCG Paris+33 1 40 17 10 [email protected]

Asia-PacificTjun TangBCG hong Kong+852 2506 [email protected]

The Boston Consulting Group | C

© The Boston Consulting Group, Inc. 2012. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. one Beacon Street Boston, MA 02108 uSa

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