BCG Report Portends Survival of the Fittest in Fund Industry
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Wednesday, July 08, 2009

BCG Report Portends Survival of the Fittest in Fund Industry

How will the mutual fund world of the future look? Boston Consulting Group’s July 2009 report titled Conquering the Crisis looked back on key data from 2008 and presented predictions for the future mutual fund landscape in the face of recent severe financial downturns. While the report notes that the crisis will certainly result in a reorganization of the mutual fund industry that will hit those with shaky business models or undifferentiated products, it also stresses that this reorganization can present clear opportunities to funds that present forward-thinking strategies that identify and capitalize on what they do best.

Most notably, the report focuses on the prediction that there will be a growing gulf between winners and losers in the fund industry in the face of falling assets and an economic recovery that will be slower and longer than many expect. Fund managers will face an uphill battle in continuing to grow their assets in order to ensure profitability in the face of falling profit margins industry-wide—the report estimates that average operating margins for asset managers will fall to 30 percent or lower, down from an average of 38 percent in 2007. Managers will also have to respond to investor and regulator demands for transparency and service by upgrading their distribution, product base, operations and support schemes while managing to control costs. Those weaker funds that are unable to stand out among their competitors based on products or service will slowly vanish from the market.

BCG also claims that asset managers will eventually begin to create what the paper calls a "factory" for their products in order for their funds to gain advantages of scale. This approach will play out in coming M&A and consolidation activities, and the paper notes that this "industrialization" trend represents a novel shift in the structure of the asset management industry as a whole.

ETFs in particular, the report notes, may be a beneficiary of the industry shakeup. BCG predicts that ETFs will experience accelerated growth fueled by investors’ increased demand for products that deliver cheap beta. The growth of passively managed offerings as well as innovative offerings such as hedge funds and private equity will put an “ongoing squeeze” on traditional actively managed products.

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