Hypercompetition, increasingly demanding clients, and incursion from players such as investment banks are bearing down on asset managers, requiring them to take action or risk loss of market share and profits, according to a report released today by global management consulting firm Boston Consulting Group.

Hypercompetition, increasingly demanding clients, and incursion from players such as investment banks are bearing down on asset managers, requiring them to take action or risk loss of market share and profits, according to a report released today by global management consulting firm Boston Consulting Group. The new report, The Growth Dilemma: Global Asset Management 2007, examines industry growth patterns, explores current trends, and outlines specific actions that asset managers can take to raise profitability in today’s challenging climate — a climate that is being influenced by factors such as the unsteady US economy, the direction of interest rates, and the impact of the subprime crisis. The report is based on a benchmarking study of leading competitors and on a detailed analysis of thirty-one national markets. BCG says that players seeking growth in assets under management and profits must take action in complementary ways: first, by defining and marketing their competitive positions more proactively in order to attract and retain target clients; second, by innovating on both the product and marketing sides, highlighting their strengths compared with those of new rivals; third, by enhancing risk management systems; and fourth, by developing a presence in attractive new markets. According to the report, industry consolidation is continuing at a brisk pace but becoming ever-more difficult — not because the number of asset managers is dwindling but because the scale involved entails high complexity. The report says that a notable trend is that many of the largest players, along with some smaller, highly focused boutiques, are squeezing out a fair number of midsize players. But growth must be pursued organically as well. “Acquisitions are not a cure-all,” said Andy Maguire, a BCG senior partner based in London and lead author of the report. “They are a way to realize specific objectives such as gaining product expertise, fostering innovation, developing a speciality, entering a new market, or creating a multiboutique model. The subprime crisis may have created some opportunities for timely and reasonably priced acquisitions, but asset managers will still need to be extremely selective in evaluating potential candidates.” The report makes clear that despite major challenges ahead for players of all types and sizes, asset management remains a strong, profitable business. In 2006, the value of professionally managed assets rose globally by 13 per cent to $53.4 trillion. The average profit margin of BCG’s benchmarking participants was 42 per cent. Also, industry growth has reached across all regions. The US market, home to 48 per cent of global AuM, grew by 15.2 per cent to $25.7 trillion in 2006. Europe, with 36 per cent of global AuM, expanded by 10.9 per cent to €15.5 trillion. The Asia-Pacific region, with roughly 12 per cent of global AuM, increased by 10.2 per cent to $6.5 trillion. Emerging markets in Eastern Europe, Asia-Pacific (excluding Australia and Japan), and South America grew by between roughly 20 and 50 per cent. BCG says that if current growth rates continue, emerging markets’ share of global assets under management could rise from about 4 per cent today to as much as 13 per cent by 2016. According to the report, continuous innovation in both products and marketing often influences clients' investment decisions more than performance. Asset managers will therefore need to make strong efforts in these areas in order to sustain growth. New products should address the joint quests for higher returns and diversification. Asset managers can, for instance, develop and refine new asset classes such as actively managed structured products, infrastructure funds, emerging-market and distressed securities, and tailored products for specific client segments. And as asset mixes shift, the majority of asset management revenues may come from innovative products within five years. The report says that given both the increased use of complex financial instruments such as OTC derivatives and the incursion of investment banks on several fronts (including their exploitation of the boom in structured products and their direct issuance of vehicles such as certificates), asset managers will have to step up their game by developing better structuring and pricing skills.