Asset management hits record level

Industry profits are up, too, increasing to US$80 billion, although this is roughly 15% below pre-crisis highs, the report says.

The firm notes that while the record asset levels and health profits represent a recovery, it says that the industry’s AUM growth was driven largely by market gains, not new asset flows. It says that the increase in new asset flows “remained relatively modest,” reaching just 1.2% of global AUM in 2012.

And, it says that most of those new flows went into “solutions, specialties, and passive asset classes rather than to the actively managed core assets of traditional players.” As a result, it reports that a quarter of traditional fund managers actually “experienced significant erosion of their traditional actively managed core-asset base in 2012, despite the broad recovery of AUM.”

“That ongoing structural shift has heightened questions about the future of traditional managers,” said Gary Shub, a coauthor of the report and a BCG partner. “Many asset managers enjoy substantial revenue streams from their existing assets, which often mask the urgency to confront structural changes already here as well as changes to come.”

The report suggests that the most successful managers are either specialists, or traditional firms that have maintained their core businesses while also developing capabilities to capture new faster-growth assets. And, it says that U.S. firms have led the way, with U.S. managers’ 2012 profits now sitting 10% above 2007 levels; meanwhile, European managers’ profits are still down by about 31%.

The report also found widely divergent AUM growth rates both among and within regions. “Managers continue to confront a two-speed world in which the smaller, rapidly developing markets grow faster than the developed markets, with higher net flows. At the same time, AUM growth in the developed markets was significantly greater in absolute terms because of the dominant size of those markets,” it says.

Overall, the report suggests that the industry’s traditional managers “face a bumpy road of volatile markets, weakening of some revenue margins, and wide variations in performance among products and regions… That helps explain why cost discipline has been an increasing focus since the crisis, especially for managers whose assets are eroding.” Additionally, it says that cost control is necessary to afford investment in new capabilities.

“Reviewing the operating model, with a focus on operations and IT, is a growing source of strategic advantage,” said Brent Beardsley, a coauthor of the report and a partner at BCG. “Beyond boosting efficiency, a review can be the key to flexibility, scalability, and future growth.”