SOURCE: The Boston Consulting Group

November 30, 2007 00:01 ET

BCG Report: Growth Climate Toughening for Asset Managers; Fast Action Needed to Protect Client Bases and Sustain Profits

LONDON--(Marketwire - November 30, 2007) - Hypercompetition, increasingly demanding clients, and incursion from players such as investment banks are bearing down on asset managers, requiring them to take action or risk loss of market share and profits, according to a report released today by The Boston Consulting Group (BCG), the global management consulting firm.

The new report, "The Growth Dilemma: Global Asset Management 2007," examines industry growth patterns, explores current trends, and outlines specific actions that asset managers can take to raise profitability in today's challenging climate -- a climate that is being influenced by factors such as the unsteady U.S. economy, the direction of interest rates, and the impact of the subprime crisis. The report is based on a benchmarking study of leading competitors and on a detailed analysis of 31 national markets.

BCG says that players seeking growth in assets under management (AuM) and profits must take action in complementary ways: first, by defining and marketing their competitive positions more proactively in order to attract and retain target clients; second, by innovating on both the product and marketing sides, highlighting their strengths compared with those of new rivals; third, by enhancing risk management systems; and fourth, by developing a presence in attractive new markets.

According to the report, industry consolidation is continuing at a brisk pace but becoming ever-more difficult -- not because the number of asset managers is dwindling but because the scale involved entails high complexity. A notable trend is that many of the largest players, along with some smaller, highly focused boutiques, are squeezing out a fair number of midsize players. But growth must be pursued organically as well.

"Acquisitions are not a cure-all," says Andy Maguire, a BCG senior partner based in London and lead author of the report. "They are a way to realize specific objectives such as gaining product expertise, fostering innovation, developing a speciality, entering a new market, or creating a multiboutique model. The subprime crisis may have created some opportunities for timely and reasonably priced acquisitions, but asset managers will still need to be extremely selective in evaluating potential candidates."

The report makes clear that despite major challenges ahead for players of all types and sizes, asset management remains a strong, profitable business. In 2006, the value of professionally managed assets rose globally by 13 percent to $53.4 trillion. The average profit margin of BCG's benchmarking participants was 42 percent.

Also, industry growth has reached across all regions. The U.S. market, home to 48 percent of global AuM, grew by 15.2 percent to $25.7 trillion in 2006. Europe, with 36 percent of global AuM, expanded by 10.9 percent to EUR 15.5 trillion. The Asia-Pacific region, with roughly 12 percent of global AuM, increased by 10.2 percent to $6.5 trillion. Emerging markets in Eastern Europe, Asia-Pacific (excluding Australia and Japan), and South America grew by between roughly 20 and 50 percent. If current growth rates continue, emerging markets' share of global AuM could rise from about 4 percent today to as much as 13 percent by 2016.

According to the report, continuous innovation in both products and marketing often influences clients' investment decisions more than performance. Asset managers will therefore need to make strong efforts in these areas in order to sustain growth. New products should address the joint quests for higher returns and diversification. Asset managers can, for instance, develop and refine new asset classes such as actively managed structured products, infrastructure funds, emerging-market and distressed securities, and tailored products for specific client segments. Moreover, as asset mixes shift, the majority of asset management revenues may come from innovative products within five years.

The report says that given both the increased use of complex financial instruments such as OTC derivatives and the incursion of investment banks on several fronts (including their exploitation of the boom in structured products and their direct issuance of vehicles such as certificates), asset managers will have to step up their game by developing better structuring and pricing skills. They will also need to enhance risk management systems. More than ever, asset managers must protect their reputations for high expertise and integrity, as the subprime crisis has illustrated. As investors continue to become more financially sophisticated, clients will increasingly demand more transparency as well as value-for-money fee structures regarding alpha and beta products.

Achieving growth in emerging economies will be another key challenge for asset managers, according to the report. Markets in Asia-Pacific, Eastern Europe, South America, and the Middle East, although relatively small today, have enormous potential. For example, the highly diverse Asia-Pacific market represents a critical growth opportunity for asset managers. Japan and Australia, the third and the tenth largest global markets, respectively, both demonstrate all the characteristics of mature, developed markets, although China and India are increasingly taking the spotlight because of their huge populations and vast growth potential.

The report says that in approaching Asia-Pacific markets, global asset managers must carefully consider local differences and forge a clear strategy regarding which markets to enter and how. They must also assess how both to tap current growth and to position themselves for future expansion as the more nascent markets gain momentum. A strategic assessment of partnership opportunities will be critical.

To receive a copy of "The Growth Dilemma: Global Asset Management 2007," or to schedule an interview with one of the authors, please contact Eric Gregoire at + 1 617-854-4570 or

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