Company Press ReleaseProfitability Continues to be Robust, but Net Flows Are Flat
New York, N.Y.; Nov. 1, 2012 - While the North American asset management industry continues to display a “Teflon-like ability” to generate robust profits, growth is proving elusive to all but a few firms whose business models and leadership in three key growth areas - passive products, solutions and alternatives - have enabled them to gain share, according to a report released today by McKinsey & Company. Entitled The Asset Management Industry: Outcomes Are the New Alpha, the report looks beyond the industry’s current strong profitability to the increasingly challenging search for growth. It is based on McKinsey's 2012 North American Asset Management Benchmarking Survey of over 100 firms representing $15 trillion, or 65 %, of assets under management and on interviews with 30 industry leaders
Overall profitability has been strong for most asset management firms through the cycle, but the profit gap between winners and losers is widening: pre-tax profit margins were 28 percent on average and 46 percent for the top one- third of firms. While assets and revenues have recovered, profits remain more than 20 percent below pre-crisis levels, due to increased costs, reduced productivity and lower pricing. And the variance in profitability among firms is not explained by size but rather by focus and operating discipline, says McKinsey.
McKinsey’s research reveals that growth opportunities for the asset management industry are highly concentrated and shifting rapidly from the relative performance game that has dominated the industry for decades to three key categories: passive products, outcome-oriented solutions and alternatives. Moreover, since 2007, a handful of focused asset managers have been capturing a highly disproportionate share of flows within each of these fast-growing categories – anywhere from 60 % to 100 % for the top 10 firms alone — but with few winning across more than one category.
“Traditional means of achieving growth – beating a benchmark – are no longer proving sufficient and account for just over one-third of the average asset manager’s growth,” says the McKinsey report. “More critical now is meeting a changing set of client needs, which increasingly means shifting from alpha to outcomes.”
Among the report’s highlights:
· Net flows have been stagnant across the industry and are now highly concentrated in three areas: passive products, solutions and alternatives, with more than $1.3 trillion flowing into these categories from 2008 to mid-2012. At the opposite end of the spectrum, $400 billion has flowed out of relative return equity funds over the same time frame.
· Within each of the three key growth areas, fewer than 10 players are capturing the majority of the industry’s net flows, but there are virtually no triathletes. The vast majority of preeminent players within each category are dominant in that category alone; only a quarter are dominant in two categories; and only one firm is dominant in all three.
· Focused business models – for example, global specialists or retirement specialists – have gained share at the expense of generalist firms that have spread their bets, often in an unfocused way, and failed to win in any of the big three growth categories.
· Solutions are not only a significant growth opportunity; they have the potential to change the nature of the industry from alpha to outcomes. Retail solutions alone have grown 25% annually for the past five years, and McKinsey expects assets to double to $2 trillion within the next five. Institutional investors, particularly sponsors of defined benefit (DB) pensions, are also actively seeking outcome-oriented solutions as they attempt to cope with worsening plan deficits and liability management.
· Eighty percent of the asset management firms surveyed by McKinsey cite solutions as a top three growth priority, and the average firm anticipates that solutions will account for more than one-quarter of flows and 15 % of profits by 2015. Yet most face capability, credibility and organizational challenges in delivering solutions effectively and have not yet internalized the changes that will turn their ambition into flows.
“The search for growth will be an industry-wide priority,” McKinsey concludes. “Some firms will find it in alternatives and a fortunate few in passive. A number of innovators will find opportunity in the movement toward outcome-oriented solutions. Beyond significant growth – from retail clients that move past their “target date” and institutions looking to match liabilities – solutions have the potential to change the way in which products are designed, money is managed and firms are organized. The magnitude of change required is as significant as the potential for growth.”