This 18th annual BCG report on the global asset management industry takes a comprehensive look at 2019 performance and examines the challenges and opportunities that players will face in the future. The report looks closely at one of the strongest asset classes—alternative investments. This category accounted for nearly half of all global asset management revenues in 2019, despite representing only 16% of assets under management (AuM). The report further explores the need for innovative distribution strategies, explaining how and why players must create world-class client experiences that extend beyond performance at a given cost, and offer more all-encompassing value propositions.
"Firms that excel in distribution are creating data-driven business intelligence to help the entire organization develop a deeper understanding of client needs," said Simon Bartletta, a Boston-based BCG senior partner, coauthor of the report, and global leader of the firm's asset management segment. "They are also bringing the personalized needs of clients into the product development process, increasingly tailoring their offerings to such areas as environmental, social, and governance investing."
A snapshot of industry performance. The total value of global AuM grew by 15% in 2019 to about $89 trillion, up from about $77 trillion in 2018. Retail clients, representing 42% of global assets at $37 trillion, grew even faster, at 19% in 2019, while institutional clients, representing 58% of the market, grew by 13% to $52 trillion. Market performance was the primary driver of this growth, contributing roughly three-quarters of the AuM expansion in 2019 as markets across regions posted record highs for the period since the 2008–2009 financial crisis. Moreover, record net new asset flows painted an encouraging picture of robust investor demand. Net flows totaled $2.6 trillion globally, accounting for 3.4% of global AuM at the start of the year—a significantly higher proportion than the historical average of 1% to 2%.
The alternatives revolution. Alternatives continued to be among the strongest asset classes in 2019, with AuM growth accelerating to 13%. BCG expects alternatives to grow at an annual rate of 4% through 2024, at which point they will represent an estimated 17% of global AuM and capture 49% of global revenues. The key driver of this growth, the report says, will be investor demand for heightened performance, uncorrelated returns, illiquidity premiums, and other nontraditional return profiles—particularly as institutions across the globe face the challenge of a widening gap between assets and liabilities.
Nonetheless, challenges lie ahead. This demand will come with an increased level of investor scrutiny, as the global economic uncertainties of 2020 reach into virtually every corner of the markets. At the same time, liquid investable capital is likely to decline sharply in the wake of this year's global economic downturn, and a short-term flight to safe-haven assets is likely.
The next wave in distribution. The report says that asset managers can retain client business by offering a competitive edge in any of several ways: through performance, by delivering better results; through cost, by delivering the same results as rivals, but for less; and through overall client experience, delivering more total value. Historically, performance-based and cost-based business models have dominated the industry—and both will continue to be relevant. However, they have natural limitations.
According to BCG, firms that are leading the way in client experience view it as a transformative strategy. In particular, they consistently apply five best practices that result in a greater share of wallet, higher retention, and preferred economics: lead with data-driven business intelligence; build robust data and technology organizations; realign sales and marketing; upgrade the product development cycle; and adopt a client-centric culture with commensurate incentives.
"Overall, the market storm of early 2020 has only intensified the industry's challenges, as asset managers find themselves in uncharted territory," said Lubasha Heredia, a New York–based BCG partner and coauthor of the report. "After the crash of 2008, the asset management industry benefited from a market rebound that produced the longest bull market in history. In 2020, however, firms must recover flows and profitability through more fundamental changes to their business models. This is both a challenge and an opportunity to accelerate and shape what the future of asset management could look like."
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].
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