Last year, the global asset management industry grew its assets under management (AUM) by 15% according to new analysis published by the Boston Consulting Group (BCG). By the end of December, a total of $88.7 trillion was invested with firms worldwide, up from $76.9 trillion the year before.
Most of this increase was driven by rising markets, but 2019 also saw much higher net inflows than the 10 year average.
‘These flows weren’t captured equally,’ said Lubasha Heredia, a partner at BCG in New York. ‘The larger firms took a larger share of those flows, particularly in the US. There is a “winner-takes-all” dynamic in the industry and we expect that to continue.”
This has been one of the key themes identified by BCG in its annual Global Asset Management report over the past few years: the larger firms continue to get larger and take a greater market share.
However, this is not the case in South Africa. Over the last five years, the market share of the largest asset managers in the local unit trust industry has been coming down.
At the end of 2014, the seven largest managers – Allan Gray, Coronation, Investec Asset Management (now Ninety One), Nedgroup Investments, Old Mutual, Sanlam and Stanlib – enjoyed a market share of 64.8%. By the end of 2017 that had slipped to 62.1%, and at the end of 2019 it was down to 60.7%.
While this still puts these firms in a dominant position, smaller and mid-sized managers have been receiving greater net inflows.
For example, Stanlib grew its total AUM by 19.3% over the five years from the start of 2015 to the end of 2019. Prescient, by contrast, increased its AUM by 178.1%. (This is at the management company level, so includes co-branded funds.)
Even in South Africa, however, larger firms in an a favourable position.
‘Scale continues to be a source of competitive advantage because if offers you the opportunity to have a cost advantage on the back end, but also allows you to make large investments in new capabilities,’ said Heredia. ‘That capacity is really important if you want to win in the future.’
One area where BCG believes this will be particularly relevant is data science. Firms will increasingly begin to compete on customer experience, and that requires having the tools to understand client needs and deliver personalised solutions.
It is also likely, however, that increased competition from non-traditional players and the need for new business models will place increased pressure on profitability. This will further entrench the size advantage.
In particular, asset managers will almost certainly face a challenge from digital giants like Amazon and Google that already have much better distribution capabilities, and the ability to personalise customer interactions and offerings.
‘We have seen some evidence of these firms moving into financial services and it wouldn’t be a stretch to imagine that they could move into this space as well,’ said Heredia. ‘And that would dramatically change the shape of profitability.
‘It would also reinvent distribution models,’ she added. ‘With Covid-19 the move to digital engagement is already intensifying and it would be interesting to see what the profitability of some of these business models will look like, I expect it won’t be as rich as the traditional way of doing business.’
These are trends that are likely to encourage further consolidation within the industry.
There are others too.
The first is to acquire better distribution capabilities.
‘Are there new ways that firms need to operate in this world where the old wholesaler model, at least in the US, is breaking down?’ said Joe Carrubba, a partner at BCG in New York. ‘We think the necessity is going to force it.’
The second is to capture new revenue streams.
‘Another reason we think there is strong logic to continue M&A activity is that a lot of firms may have particular product gaps, especially in the alternative space,’ said Heredia. ‘M&A could be a good strategy to close that product gap in a fast way.’
BCG forecasts that alternatives will contribute almost half of all industry revenues within the next four years. This is despite making up less than a fifth of AUM.
As cost pressures reduce revenues from traditional solutions, large asset managers could therefore increasingly look to alternatives as a way to support margins.
Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.
This article was first published on Citywire South Africa here, and republished with permission.