Fund management businesses face fundamental problems despite booking robust growth and profit numbers last year, according to a new Boston Consulting Group (BCG) study.
And BCG suggests the solutions will see cost-cutting, consolidation, more exchange-traded funds (ETFs), private asset tilts and distribution shake-outs across the industry.
The 23rd edition of the BCG ‘Global Asset Management Report’ published last week found the sector grew 12 per cent in 2024 to register a record US$128 trillion in total assets as year-on-year revenue leapt by US$58 billion.
But soaring stock markets drove about 70 per cent of asset and fee gains, obscuring structural “fee compression” trends.
“Although the industry can celebrate another year of growth, asset managers must be aware of the underlying threats to their legacy products and distribution channels, as well as to the operational models behind them,” the BCG study says.
The report says the industry must respond to three core challenges covering product and distribution, the need for scale and managing costs.
For example, the inexorable shift to low-cost ETFs for both passive and active strategies is cutting into manager margins but may also lead to “closer long-term customer ties”.
“This is especially important at a time when the economics of the industry are tilting more and more toward the entity that owns the investor relationship—the distributor,” the BCG study says. “In particular, asset managers might consider developing products in the relatively fragmented and nascent active ETF space.”
Similarly, BCG says firms have much to gain from developing private asset funds for the mass-market as well as in collaboration with insurers.
Mergers and acquisitions look likely to continue apace, too, the report says, amid squeezed fee margins – largely due to a shift to low-cost products – and rising costs. BCG estimates that fees incurred on new money flowing into the sector in 2024 fell 0.4 per cent compared to the previous year.
“The consolidation we are seeing tends to revolve around strategies for broadening product offerings, expanding global presence, building technology capabilities, securing more permanent capital, and increasing proximity to clients.”
Scale benefits usually kick in when assets under management hit US$500 billion, according to the BCG analysis.
But fund managers are also looking to rein-in spiralling expenses through the three different lenses of “investment management and trade execution; sales, marketing, and operations; or IT”.
“Although these models differ in focus, all of them can benefit further from a zero-based approach to cost management,” the report says.
“This approach entails reexamining all costs and may lead to such changes as outsourcing noncore functions, automating processes with generative AI (GenAI), and avoiding dual-run costs, especially in headcount.”
The study says the funds management market is resolving into three increasingly distinct functions of “alpha shops, beta factories, and distribution powerhouses and solution providers”.
“As the industry experiences further separation between alpha shops and beta factories, distribution and solution providers are serving as the gateway to clients across channels,” the report says. “To stay competitive in this role, they should consider strategies to get closer to key intermediaries such as outsourced chief investment officers (OCIOs) [implemented consulting] and consultants.”
The 2024 BCG data shows the seismic shift to passive continued as the total market share of actively managed funds – while still the majority – shrank to 61 per cent from 65 per cent in the previous year.
“Net new flows reflected this trend, with $0.1 trillion in outflows from active funds, excluding money market funds, versus $1.6 trillion in inflows to passive funds,” the report says.
However, it wasn’t all bad news for alpha shops with outflows stabilising last year and strong growth in actively managed ETFs.
The BCG study also found the US$337 billion of outflows from active funds in the US accounted for all of the negativity in 2024.
“All other regions saw positive net flows into active funds, driven largely by fixed-income funds and actively managed ETFs.”
The report was compiled by a panel of BCG authors including London-based partner, Dean Frankle.