Investors' increasingly aggressive hunt for the best returns will force the global asset management industry to up the ante and become more competitive, according to research released on Monday.
The conclusions, outlined in a study released by Boston Consulting Group, could be sobering even as the industry, known for its robust profit margins, last year continued its recovery from the financial crisis.
Globally the value of managed assets rose 8 percent to $56.4 trillion in 2010, though less than the 13 percent gain in 2009, according to BCG.
But those gains were mainly due to rising equity markets rather than new inflows of cash from investors, the key measure of success for big fund companies.
Profit margins, which had peaked at 39 percent in 2007, just before the financial crisis hit, continued their recovery. BCG said margins across the industry rose to 33 percent last year from 31 percent in 2009.
During the crisis many investors became much more focused on returns and performance, said Gary Shub, a BCG partner and one of the study's co-authors.
Investors are willing to pay active managers only if they're going to outperform the market, he said. The headline is that the investor has become more demanding.
The result will be something of a barbell-shaped industry, Shub said, with the best performing companies at one end, drawing more assets, while the worst performers will see slow growth or outflows.
(For a breakdown of Global assets under management click here: http://r.reuters.com/tub62s )
WINNERS AND LOSERS
The study did not make predictions for specific companies, but the dynamic described by Shub appears already under way: companies with mixed performance records have reported steady outflows in recent quarters, including Janus Capital
Other asset managers, whose funds have achieved better returns, have posted inflows, including Franklin Resources
The companies with the largest inflows in the United States in 2010 were closely held Vanguard Group Inc and Fidelity Investments, and the Pimco unit of Allianz Global Investors.
While the report said the consolidation process among asset managers is set to continue, Shub said BCG does not expect a big round of consolidation to take place among asset managers that would continue the pace of recent deals like BlackRock Inc's
For one thing, the industry's high profits reduce the pressure on companies to sell even when they are not capturing flows. Also, distributors -- such as the brokerages that sell mutual funds -- are reducing the number of products they carry, which cuts the value of new products for would-be buyers.
GAINS FOR ALTERNATIVES, PASSIVES
The BCG study said alternative and passive products should keep growing faster than actively managed funds, and highlighted the increasing shift of assets into emerging markets including China and elsewhere in Asia.
For instance, 33 percent of European institutional investors planned to raise the share of assets allocated to Asian equities, and 41 percent planned to raise the share of equities they hold in other emerging markets, BCG found.
Shub said the consulting group expected the U.S. market to continue making up nearly half the world's asset management space for years, given its sheer scale: $27.6 trillion in 2010, up from $25.5 trillion in 2009.
In comparison, Asia, excluding Japan and Australia, accounted for $2.9 trillion in assets under management in 2010, up from $2.6 trillion in 2009.
Still, developing markets will provide much of the industry's growth in coming years. Despite choppy markets, assets under management in China, Brazil and India had growth rates well above 10 percent from 2007 to 2010, the study found.
(Reporting by Ross Kerber, editing by Knut Engelmann and Matthew Lewis)