Markus Massi, a Partner & Managing Director at BCG Middle East
Professional managers of institutional assets and retail mutual funds retained a good momentum in 2010 in the Middle East and around the world, confirming the rebound from the global financial crisis. However, building on the recovery and achieving a stable growth trajectory will remain a tall challenge, according to a report released recently by The Boston Consulting Group (BCG).
The report, Building on Success: Global Asset Management 2011, BCG’s ninth annual study of the worldwide asset-management industry, draws on a detailed benchmarking of leading industry competitors that BCG conducted early in 2011. The report also reflects a comprehensive market-sizing effort.
According to the report, the global value of professionally managed assets rose by 8 percent to $56.4 trillion in 2010.[i]The increase—which followed a gain of 13 percent in 2009 and a decline of 17 percent in 2008—was driven principally by the continuing recovery of equity markets, with net new inflows remaining marginally positive.
There was wide regional variation in AuM expansion in 2010, the report says. Latin America, with an increase of 18 percent, posted the strongest growth. In North America, AuM rose by 8 percent, led by the United States (8.5 percent). AuM in the Middle East and South Africa combined increased above global average by 10% in 2010, retaining the momentum of a year ago when the AuM growth rate was 13 percent. AuM in Europe rose by 7 percent, with considerable variation across countries. Japan and Australia, the two largest markets in the Asia-Pacific region, posted a combined AuM increase of 2 percent (1 and 4 percent, respectively), while AuM rose by 11 percent in the rest of Asia, slower than in the precrisis years.
The further recovery of AuM in 2010, along with a shift in asset structure, translated into a slightly improved profitability for asset managers. Average revenue margins rose to 29.8 basis points, up from 29.0 basis points a year earlier. Many players were also able to hold the line on costs, which remained at roughly 20 basis points in 2010. Ultimately, profit margin as a share of net revenues reached 33 percent, up from 31 percent in 2009 but still below the historical peak of 39 percent achieved before the crisis.
Although higher overall profitability has contributed to slower consolidation among asset managers—there have been fewer large deals since the beginning of 2010 than there were in 2009—the process of consolidation will still continue, the report says.
Additional findings for the Middle East included:
Professionally managed assets: In the Middle East, professionally managed assets amount to roughly USD 1 trillion, or a quarter of assets in the region. While BCG expects total assets (both direct and indirect) to grow by around 8% in the coming years, professionally managed assets are estimated to grow at a slightly stronger rate of around 9%-10%.
Asset class structure: Regional investments will continue to be mostly direct. Overall, the asset class mix will stay mostly unchanged.
Expectations for local managers: Despite the favorable conditions for local asset managers, their success may be constrained by a number of factors. These include a lack of investable assets in the local markets, a lack of experience in relation to managing foreign assets and a lack of distributional discipline. It is, therefore, expected that the majority of professionally managed funds will be with international asset managers, due to their proven track records. Additionally, a broader consolidation of regional asset managers seems unlikely.
Dr. Sven-Olaf Vathje, a Partner and Managing Director at BCG Middle East, elaborated on the findings for the Middle East. “While Sovereign Wealth Funds have often maintained a stable share of professionally managed assets, we have found that private households demonstrate a long term trend to increase their professionally managed assets. This trend is also evident among insurers, who seem to be increasing their professionally managed assets as part of a broader asset management professionalization drive”.
According to the report, the postcrisis evolution of the global asset management market is reflected by the following trends, which also apply to the Middle East:
- Investor demands keep toughening. The financial crisis, by introducing great market uncertainty and calling traditional investment beliefs into question, made investors more likely to scrutinize and challenge the investment decisions made by their asset managers.
Product dynamics continue to shift. Many product shifts observed before the crisis have continued through 2009 and 2010 and into 2011. One key ongoing trend is the faster growth of more risk-averse, passively managed and alternative products, compared with actively managed products. In the Middle East, money market products or capital guaranteed products play a larger role compared to other markets.
Different markets face different competitive challenges. There are different sets of challenges for different markets along the entire asset-management value chain. Mature markets such as North America, Europe, Australia, and Japan—where penetration of some asset-management products is stagnating—will likely grow at a modest pace overall. Developing markets such as the Middle East, Latin America and many parts of Asia will likely grow at a faster pace, albeit from a much lower base of regional and domestic AuM.
Markus Massi, a Partner & Managing Director at BCG Middle East, commented: "To pursue growth across borders in the Middle East, asset managers must first develop a clear view about which markets they would like to enter given their current capabilities and resources. Just as important, they must accurately assess the level of competition in the new market as local distribution power and connections are key and investor preferences and institutional set-up vary by GCC market. Finally, they must decide where they do not want to be in terms of regions, products, and client segments. Every asset management company cannot stand for all products – credible specialization and customer focus is key."
“Surprisingly, some asset managers begin their expansion initiatives without fully addressing these basics” Massi added.