Funds management margins are set to fall by 11 per cent over the next few years, according to a new global survey, as modest asset growth, rising costs and competitive pressures keep a lid on profits.
However, the Bloomberg Intelligence study – produced in association with UK-headquartered legal firm Simmons & Simmons – says asset managers hope that a swing back to active strategies, albeit with a passive twist, could contain the margin compression.
The Bloomberg global survey of almost 2,000 fund management professionals across the world found respondents expect to see a rise in both active strategies and the use of exchange-traded funds (ETFs) by 2025.
“Our survey suggests a significant shift in that perception as asset managers seek the best of both worlds: the higher fees of active management coupled to the lower cost of ETFs likely to produce a boost in profit margins,” the report says. “… Reading across to other results in the survey, it may be that the increases in investment in New Technology, Big Data, Quants and Alternative/Big Data tell a story of an industry seeking to find new, cost-efficient ways to generate excess return for investors.”
As well as looking for a profitable mix of active investment and passive execution techniques, fund managers were also targeting growth in alternative assets (such as infrastructure), and the twin trends of environmental social and governance (ESG) and impact investing “in a bid to capture higher fees and boost overall margins”.
While ‘millennials’ underpin the ESG and impact investment trends, the Bloomberg study says there is a growing demand in those areas across all age groups.
“When combined, ESG and impact investing offer strong sources of both AUM and profitability and respondents are clear in anticipating the opportunities the present for asset managers who embrace this Millennial-driven trend,” the report says.
Millennials, though, represent something of a dilemma for fund managers given the overall generational decline in savings.
“In some ways the survey’s findings around the impact of Millennial savers on asset management is a microcosm of the industry’s entire challenge: potentially slower [assets under management] AUM growth but an opportunity to arrest margin declines,” the Bloomberg study says.
Overall, the survey found asset managers are picking “strong but not stellar” AUM growth of 21 per cent by 2025, in contrast to other more optimistic reports.
The slow but steady AUM growth, competition and increasing regulatory pressures will inevitably put a dampener on margins, the study says, forcing managers to cut costs as well as innovate.
Compliance, new technology and ‘big data’ rank as the three biggest cost centres for asset managers over the next few years, according to Bloomberg.
“The areas of expected cost reduction were more startling, with anticipated cuts to the heart of the traditional asset management business – Portfolio Management and Dealing and Execution – perhaps reflecting the rise of the robo-advisor and more automated dealing and trading infrastructure,” the report says.
Against the backdrop of lower growth and margin compression, the study says the global asset management industry is likely to see more merger and acquisition (M&A) activity ahead.
“It may be that the bias towards M&A, including the 12% of the sample who expect to Be Acquired, is a fitting coda to the broad narrative arc of our survey,” the report says.
“… In any mature industry, consolidation through M&A is a typical feature. Our survey suggests that we have crossed that threshold and are likely to see an acceleration of the consolidation trend over the next few years with new, more agile and tech-savvy players harrying the more established leviathans.”
The ‘Asset management outlook to 2025’ report was authored by: Sarah Mahmud of Bloomberg Intelligence; and, Simmons & Simmons staff, Waheed Aslam, Colin Leaver and Andy Hartwill.