Which Asset Managers Will Survive The 'industrial Evolution'?

In its white paper, entitled Industrial Evolution: Securing Profitable Growth in Tomorrow's Asset Management Industry, Deloitte consultancy Casey Quirk said profitable growth has become elusive as there have been no dramatic changes to revenues, costs or both at some firms, while a quarter of all firms risk becoming unprofitable by 2028.

Tom Brown, global head of asset management at KPMG, said: "Ultimately, the asset management sector needs to change to survive. This is true of the whole of financial services, but it is especially acute in asset management, which is now in the spotlight and under pressure."

Asset managers warned to cut costs as outlays rise 8% in 2017

He believes asset managers need scale or expertise in a niche area to survive and so mid-market players without a very clear "go-to market strategy" will suffer over the next five to ten years.

Invesco chief executive Martin Flanagan also said in a Financial Times report last week that a third of the industry could disappear over the next five years as mounting fee pressures and rising costs spur more closures and consolidation.

Flanagan added: "The industry is going through dramatic changes right now. Winners and losers are being created today like never before. The strong are getting stronger and the big are going to get bigger."

One of the primary drivers is downward pressure on revenues as cheap passive products become more popular while active managers continue to struggle to cut costs.

Cost cutting

Casey Quirk found around 35% of firms attempted to cut costs during the period under review but to no avail, with the median peer only managing to shrink costs by 0.4% while its revenue plummeted 6% and assets shrank by 3% through redemptions.

Ben Williams, diversified financials analyst at Liberum, said cost bases are fixed but revenues are not and - as seen during the volatility in 2018 - can fluctuate quite aggressively, which creates a difficult situation to manage.

"You can no longer charge 1% a year for a low-alpha or no-alpha product and you cannot charge for a fund whose performance can mostly be replicated by a tracker or ETF (in the case of a sector fund)," he said.

"Only solutions-focused and high active share equity funds make sense today. Lots of managers running barely profitable funds will end up closing them, as can already be seen."