Reports

Asset Managers Told to Raise Competitiveness or Lose Clients - BCG Report

Stephen Harris 13 December 2006

Asset Managers Told to Raise Competitiveness or Lose Clients - BCG Report

Despite positive trends in the value of the funds they manage, global asset managers must take forceful initiatives to improve the integrity...

Despite positive trends in the value of the funds they manage, global asset managers must take forceful initiatives to improve the integrity of their businesses if they hope to remain competitive as industry dynamics shift in step with demographic patterns, according to a new report by global management-consulting firm, Boston Consulting Group. The new report, Playing the Long Game: Global Asset Management 2006, examines the current state of the industry, offers a detailed analysis of the market for retirement assets, and outlines specific actions that asset managers can take if they seek both to raise profitability and achieve a leadership position in the industry. According to the report, which is based on a study of 28 national markets, the value of professionally managed assets — those for which a management fee is paid — grew by around 15 per cent globally to $49.1 trillion in 2005, with capital inflows driven largely by growth in Europe and Asia. Assets under management in both Europe and the Asia-Pacific region grew by more than 20 per cent in nominal terms, compared with 9 per cent in the US, although the latter remains the largest in the world, with more than $22 trillion in assets under management. BCG says that asset managers, in order to improve the integrity of their overall businesses, must optimize distribution networks, enhance segment and asset-class expertise, explore the development of innovative products, foster investment-manager autonomy, enhance scale, and continue to cut costs. A highly disciplined approach to distribution will be particularly critical because the bulk of power and influence in the industry is continuing to shift away from manufacturers toward distributors and intermediaries that control customer relationships. In order to improve competitiveness specifically in the market for retirement assets, players need to redefine their product portfolios, broaden advisory capacity, invest more in the customer experience, sharpen risk-management capabilities, and keep up with regulatory shifts. In analysing the market for retirement assets, BCG says that the US is the most attractive country for asset managers. The roughly 71 million American baby boomers in the 40-to-59 age bracket control an estimated $8.4 trillion, with the 60-to-69 age bracket (17 million strong) controlling an additional $4.2 trillion. The primary opportunity for US asset managers is capturing funds as they shift from one type of investment to another, such as from corporate sponsored defined-contribution and defined-benefit plans into retail IRAs and annuities. The potential annual flow of such “money in motion” in the US is about $1.5 trillion, the report says. There is less opportunity for asset managers in Western European retirement markets, according to the report, because public policy reforms are proceeding slowly and reliance on state pension schemes remains high. In other major markets such as Australia, Canada, and Japan, competition is highly concentrated among the top four or five players, the report says. The main opportunities lie in developing targeted sales forces and scalable platforms. The report notes that traditional core businesses of actively managed equity, bond, and money market funds are coming under increasing pressure. Although revenue margins have showed relative stability since 2004 — at around 45 to 50 basis points for equity funds and 15 to 20 basis points for bond and money market funds — asset growth across the core is expected to stay in the middle single digits over the next few years. But asset growth should be stronger in noncore offerings such such as index funds and exchange-traded funds, as well as alternative investments such as hedge funds and private equity.

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