“We’re coming from a period of three decades of development… and growth… Remember, in the 90s, this was a nascent industry… [it was] nurtured by structural factors [such as] demographics and accumulation of financial wealth… This remains a growth industry with strong factors supporting development,” said Pierre-Ignace Bernard, senior partner at McKinsey.
Leaders like Vanguard are pushing on the prices whenever they would reach critical mass in certain products
In 2021, the industry globally reached “all-time highs in terms of revenue and in terms of profit pools,” commented Niklas Nolzen, partner at McKinsey. Things turned sour in the following two years. Despite a stable asset base, he noted that profitability has declined the most in Western Europe (profit down 33% vs 2021).
Bernard and Nolzen were speaking at the Clearstream Fund Summit on 10 October 2024.
Mixed perspective for the near future
It’s not all bad news. After having reached a trough of €949bn in 2022, McKinsey expects global net flows of €4.5trn in 2024, a level “significantly above the average flows” observed in the decade before the crisis. However, some perspectives are in order. The consultancy prognoses revenue margins to stand at around 15 bps against 35 to 40 bps before the last crisis.
“Passive [ETFs] in Europe have captured between one and two percentage points of market shares, year after year,” said Bernard. Indeed, according to McKinsey’s slides, the market share of passives in terms of asset under management has doubled to 24% in 1H24 compared to 2015. Yet the pressure on fees means that that passive investments are responsible for only 5% of global net revenues, a level unchanged compared to 2012. “Leaders like Vanguard are pushing on the prices whenever they would reach critical mass in certain products,” opined Bernard.
On the other hand, alternative funds have seen their shares of assets under management rise from 12% in 2012 to 15% in 2023. Contrary to passive investments, the share of global net revenues for alternative funds rose from 37% to 46% for the same period.
Investing heavily into alternative funds may be a recipe for success to improve an asset manager’s earning power. It is not that simple. McKinsey observed that the lion’s share of cumulative gross flows (€104bn) went to the top ten asset managers while the next 190 AM firms attracted only €15bn between 2019 and 2023. Only one traditional AM made it to the top 10. “It is a challenge for traditional asset managers to develop into alternatives, because the set of skills are not similar, not only for the management, but also for distribution, etc,” remarked Bernard.
Bernard observed that “by construction, traditional AM are stronger and faster, developing into certain part of the alternative landscape… such as liquid alternatives… and credit debt.”
Globalisation of the growth opportunities
McKinsey also observed that cumulated net flows in the last five years in Western Europe were captured by 56% of non-Europe domiciled asset managers. The next region on the list was Japan & Australia. The same net flows were captured by “only” 24% of the non-Japan & Australia AMs. “It tells two things for us. First, indeed, Europe is a very open market. Second, there is room for international development for European asset managers, because it seems that in the rest of the world, the bulk of the market is still quite closed and in the hands of local players,” analysed Bernard.
Estimated accumulated net flows between 2024 and 2027 at the global level
McKinsey expects the traditional, passive and alternative businesses to attract 40%/40%/20% of global net flows. In terms of regions, Bernard thinks that “Asia feels like generally attractive across categories,” whereas North America will continue to be “very big in AUM.”
On “run rate revenue,” McKinsey expects the traditional, passive and alternative businesses to display a 30%/10%/60% breakdown, respectively. “And here again, the growth opportunity is massive in Asia,” stated Bernard.
What does the industry need to do to be successful going forward?
First, Nolzen called it “setting the foundation… it’s about investing, reallocating resources into growth.” McKinsey’s models estimate that it takes an “investment of 10% to 15% annually, 10% to 15% of profits annually, to become a top quarter player in terms of growth.”
Overlapping somehow with the first step, Nolzen suggested, secondly, to devote “a lot more investment to growth… and to refocus on core competencies.” Nolzen thinks that “all participants are significantly under investing compared to what it would really take to unlock the full growth potential.”
Third, Nolzen believes that it is critical for asset managers to have their organisation “mobilised” to attract and retain “the most educated people for the industry.” In addition, he talked about the “push technology” which is about investing beyond keeping the lights on. Asset managers “spend 60% to 70% of the technology budget on just maintaining legacy. In other words, there’s only 30% to 40% that’s really allocated to change budget.”