Boston Consulting Group (BCG) recently released their 20th annual report on the global asset management industry. In “From Tailwinds to Turbulence”, they offer a retrospective analysis of the favorable industry environment of the last several years as well as provide insights into upcoming opportunities and challenges.
The past two decades between 2001 and 2021 presented an outstanding market environment for the asset management industry, with assets growing fairly steadily, including rebounds from any severe downturns. 2021 was particularly strong, with global AUM up over 12 percent—reaching a total of more than $112 trillion.
A notable driver of revenue growth for the industry between the period 2005 to 2021 was the strong performance in equity markets, accounting for 90 percent of revenue growth. However, juxtaposed against this spectacular growth, operating pressures almost entirely offset any gains in profitability as investors changed their investment holdings to lower priced products—a continuing trend and challenge. BCG notes that even with these pressures, the operating profit margin for the industry was 38 percent in 2021, up slightly from 36 percent in 2020.
The report further outlines a hidden cost to this long period of asset appreciation — most of global AUM in pooled products such as mutual funds and ETFs are invested in “legacy products”, making it difficult for the newer funds/companies to differentiate, much less raise significant AUM. See illustrative charts below.
Another hard fact—as investors move to the lower fees of passively managed products, they have concentrated 75 percent of all new passive capital the past ten years to the top ten global passive players.
As for opportunities for growth—investor interest in alternatives like private equity, hedge funds, and real estate continues to rise regardless of long lock-ups, with a notable industry focus on distribution to retail investors. BCG expects to see alternative investing grow to more than half of all global revenues in the industry within the next five years.
Another area slated for tremendous growth is sustainable investing, as the industry develops portfolios that support sustainable practices. The supply of climate-aligned capital is expected to grow steadily across both retail and institutional sectors. The report estimates that the sustainable investing market could support over $25 trillion of equity and bond investments over the next 30 years.
Finally, opportunities continue to be unlocked by technology, with digital advances making it economically feasible to serve clients of all sizes. In 2021, global net flows from retail were more than double those from institutional investors. Resultingly, retail investors continue to be one of the most coveted investor segments.