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Adapting to a new normal in European asset management

McKinsey 26 Nov 2019 12:00

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Asset-management industry economics in Western Europe have remained relatively resilient, buoyed by the short duration of periods of downside market performance and asset values remaining near the current cycle’s highs (Exhibit 1). However, the industry is clearly continuing to contend with persistent structural shifts: lower returns due to interest-rate dynamics, the shift to passive and alternative asset classes, slowing organic growth, continued fee pressure, elusive operative leverage, and aggressive competition from within and outside the industry.

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Any discussion of the state of the industry must begin with an acknowledgement of the macroeconomic environment, which is typically responsible for 50 to 80 percent of growth, and which has swung the industry between extremes over the last few years. An environment of uncertainty has prevailed, leading to market conditions that are also testing investor convictions; for example, in the fixed-income markets, where more than €7.8 trillion in European bonds are currently negative yielding. Following the exuberance of 2017, when assets under management (AUM), revenues, and profits all hit record highs for European asset management, 2018 brought more challenging conditions, particularly in the public-equities market in the fourth quarter. Market valuations have since recovered with a vengeance, as European AUM have reached a record €22 trillion, though revenue and profit pools for the year are not likely to reach 2017’s high-water mark. While year-over-year 2019 AUM is up by approximately 10 percent, we expect average AUM to be up by only 3 percent. Most important, however, we expect profit margins to be down by approximately two percentage points based on our interim estimates—the result of persistent pricing pressure and absolute cost growth, confirming the continuation of the trend in which cost growth exceeds organic revenue growth net of capital market performance.

Organic growth has slowed on a global basis, influenced primarily by Asia, and China in particular. While Western Europe also has been a strong contributor to organic growth, averaging 3 to 5 percent per year since 2014, in 2018 the net-flow effect fell to approximately 1 percent, more in line with structural economic and personal financial-asset growth in developed economies.

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We anticipate continued pricing compression in Europe driven by competitive pricing by vertically integrated business models favoring proprietary managed strategies; implications of MiFID II driving fee compression in institutional, wholesale/B2B, and increasingly even in retail; and growing aggregation of demand enabling distributors and intermediaries to flex pricing power across retail and institutional channels.

2. Double down on sustainability and impact investing.

3. Get frontline tactics right (for example, distribution effectiveness driven by targeted training/upskilling to improve client proactiveness, client experience, B2B/B2B-for-consumer opportunities).

Move the boundaries: Innovate selectively

Redefine the game: Become a disruptive player

Succeeding in asset management was once relatively straightforward, matching sources of structural wealth creation and growing retirement and liability needs, with sources of capital appreciation, income, and yield. However, the success factors behind the industry’s growth have become more uncertain and will continue to evolve. The asset-management industry’s current challenges must be confronted, and managers must seek a new narrative and ambition for growth. Significant upside exists, whether it be within the current scope, or through pushing boundaries and creating new opportunities. The future belongs to those who can execute to their ambitions. The gauntlet has been thrown. Will European asset managers take it up?

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