Global management consulting firm Bain & Co says the recently benign environment of “easy money” for asset managers has masked troubling secular trends. The firm, like Casey Quirk, is also predicting a “sharp decline in profits per asset” managed.
But Bain & Co’s report, ‘After the Easy Money Boom: Stark Choices for Asset Managers’, says that even new technologies are not going to save all firms.
“Regardless of technology, however, weaker firms will find it harder to realize their desired price point or to keep a lid on cost per asset. Stronger firms, meanwhile, will seize a growing share of the market and the profit pool. We estimate that the spread in profits between the top 10 and bottom 10 companies will rise from 10bps in 2017 to 13bps by 2022, up from only 4bps in 2013,” the report says.
The authors describe three main choices for a successful funds management firm: passive assets at scale; active assets at scale; and, a differentiated niche. The passive assets at scale model is self explanatory. The active assets at scale require a low-cost base and good distribution, coupled with outsourced non-core operations and an M&A program. The niche model requires the selection of the right niche.
Bain & Co has identified three niches for the future: The product segments which currently stand out as attractive opportunities are: themed multi-asset funds investing in topics such as mobility and clean technology; socially responsible investments; and, alternative investments such as hedge funds, infrastructure and real estate. All of these can command higher fees if executed well, but they require distinct capabilities, the report says. Questions managers need to ask themselves include:
- What is the most attractive set of investors and products for us in light of the market’s competitive structure and expected growth over the next five years?
- What key factors will likely have the greatest effect on our asset growth?
- What do our customers say about their highest priorities? Which Elements of Value® matter most to them?
- How do they view our performance across these elements? What do they say are our strengths and weaknesses?
- What shifts in distribution matter to our business?
- Which capabilities are essential for successfully serving our market, and how do we perform on those capabilities? By contrast, which capabilities are less critical and can be outsourced?
- Does our technology allow us to gain a competitive advantage?
- How do we measure up in cost effectiveness relative to core peers in our market? How will our cost position likely change when growing in this market?
The report was written by Matthias Memminger and Mike Kuehnel – both partners – and Cyrosch Kalateh, a manager with Bain & Co’s Financial services practice. They are based in Germany.
Greg Bright is publisher of Investor Strategy News (Australia)