By Dan McCrum in New York
Article from Financial Times
US asset managers have failed to invest in the growth of their business, even though there is increasing consensus in the industry about where areas of opportunity lie, according to McKinsey.
In a study released on Tuesday, the management consultancy also found that greater size is not related to increased profitability, challenging commonly held assumptions about an industry that has resorted to mergers and acquisitions in order to grow.
The report said that there is consensus among executives on where growth in assets under management will come from – alternative investments such as hedge funds, retirement products, exchange-traded funds and emerging markets – but not how meaningful such growth will be.
“There was intellectual agreement that these were the right pieces, but there wasn’t the same degree of investment behind the intellectual conviction that we would have expected,” said Salim Ramji, co- head of McKinsey’s asset management practice.
The group found that in 2010, even as industry costs grew by 12 per cent, just two to three percentage points of that increase was directed to the growth areas commonly identified. Asset managers weighted investment in line with their existing asset mix rather than towards new businesses.
The study also presented an industry where companies have struggled to grow consistently over the past decade: only one in five asset managers increased sales faster than the industry average since 2002, and only one in ten did so without acquisitions.
Since 2002 there have been almost 7,000 acquisitions by US investment managers, according to Dealogic, with a combined value of $322bn.
The great majority of asset growth, however, has been taken by a small number of very large asset managers specialising chiefly in one product area, such as Pimco in fixed income and BlackRock, which has combined its own specialist fixed income house with Barclay’s Global Investors ETF business.
Multi-boutique asset managers, such as Bank of New York Mellon, which operate several different brands under one roof, were responsible for most of the rest of the market share gains, according to McKinsey.
The consultancy found very little correlation between size and profitability, however. “What we really observed was scale at a product level, as opposed to a firm level”, said Mr Ramji, who argued that generalist asset managers attempt to spread themselves too thinly, losing the benefits of scale to greater complexity.
For instance, expressed as a proportion of assets under management, industry operations and technology costs have risen every year since 2005, from 3.5 basis points to 5.1 basis points in 2010, “seemingly defying theories about economies of scale”, the report said.
While assets under management for the industry surpassed pre-crisis peaks in the second quarter of this year, profits were 15 per cent below the peak due to higher costs, McKinsey found.
Article from Financial Times
