Rising markets aren't a haven for money managers.
For the first year since the 2008 financial crisis, revenue earned by asset management firms globally fell in 2016 along with profits, according to a report Tuesday by Boston Consulting Group. While assets under management increased 7 percent to $69 trillion, most of that growth came from rising markets while net new money from investors was little changed from recent years.
"The biggest thing is this whole notion around continued growth of assets but decline of the profit pool," said Brent Beardsley, the global leader of BCG's wealth and asset management practice, and an author of the report. "We've reached this tipping point."
Revenue fell by 1 percent and profits dropped 2 percent as pressure on fees increased, according to the report, which surveyed 153 asset managers globally with a combined $43 trillion. High-margin products such as infrastructure, commodities, private equity and hedge funds have been hit hardest by decreases in expenses, the data show. That's a key shift for the industry because while alternative investments such as private equity and hedge funds make up 15 percent of assets, they contribute 42 percent of revenues.
Investors are increasingly shifting their money to passively managed strategies, which typically track an index and don't produce as much revenue as active and alternative offerings. Though assets under passive management grew globally by about $1.5 trillion from 2015 to 2016, revenue from the products remained roughly unchanged at $14 billion, the study found.
To succeed in a more passive-heavy world, companies will need scale, like a Vanguard Group. They should also capitalize on robust growth in countries including China and become more adept at using technology, according to BCG.
Medium-sized companies that lack either a niche focus or the heft to compete amid plunging fees are caught in an "untenable situation," according to Beardsley. The pace of deals will quicken as the industry goes through a period of consolidation, the report said.
But mergers are not a savior in themselves. Of the 10 largest deals of publicly traded asset management companies in the past six years, only four produced a total shareholder return that clearly outperformed the industry, according to the report. Effectively integrating merged companies and finding revenue synergies will be crucial to success.
One area of growth for managers is China, where the asset management industry is significantly underdeveloped, Beardsley said. The country's assets under management increased 21 percent in 2016 driven by a 17 percent rise in net new inflows. Rising levels of household wealth there, along with the development of insurance companies and pension funds, offer the potential for significant gains in coming years. Foreign companies also have an increasing number of ways to enter the Chinese market, according to the study.
"It's more open than it's ever been," Beardsley said. "The really successful firms will gain footholds there."
While the surge of opportunities in China is mobilizing asset managers, firms have been slow to capture another global trend that is "revolutionizing" the industry: the increased use of analytics and artificial intelligence. Less than half of asset managers surveyed said they use advanced analytics or big data, according to the report. The prospects for applying technology are great, however. It can help managers lower costs, improve distribution and attract money to new products, according to BCG.