Growth in a Time of Uncertainty:
The Asset Management Industry
in 2015

To be among the leaders in 2015, individual firms must make explicit choices on how to take advantage of a narrow set of large growth opportunities and invest decisively behind them.

Executive summary

By late 2010 and early 2011, the U.S. asset management industry had demonstrated its resilience and returned to form in the wake of the financial crisis. Assets under management had rebounded to their pre-crisis peaks, overall profit margins were up by 5 percentage points from crisis lows – and back to their long-term average in the high 20s – and the double-digit cost and compensation increases of 2010 were on track to repeat themselves. At the start of 2011, even pessimists seemed to believe that the good old days were making a comeback.

Market volatility and the renewed risk of financial earthquakes in the second half of 2011 not only put a damper on this optimism, but also called into question some of the industry’s beliefs about the inevitability of profitable growth. Today, leaders of asset management firms are expressing deep uncertainty about the future direction of markets and turning their focus to the next quarter’s margin rather than thinking strategically about longer-term growth.

To gain insight into how asset management firms can generate growth in a time of uncertainty, McKinsey undertook a multifaceted research effort, reviewing the past decade of results from its annual benchmarking of U.S.-based asset managers, conducting a comprehensive analysis of thousands of metrics from hundreds of asset management firms, and interviewing dozens of industry leaders. The major findings from this research include:

• While overall profitability has been strong for most firms through the cycle (averaging 28 percent), deeper structural issues remain. Even when assets peaked in early 2011, overall profit levels remained more than 20 percent below pre-crisis levels, due to increased costs, reduced productivity and lower pricing.

• Growth has proven far more elusive than profitability, with only one in five asset managers sustaining above-average growth rates over the past decade. Moreover, the sources of growth were surprising. Investment performance explained only one-third of growth; generalist business models seemed to underperform; and scale was not much of a factor. Finally, while M&A had a modest impact on growth industrywide, for the top firms, it was a significant factor.

• The market appears to place a higher premium on sustained above-average growth than on top-quartile profitability. However, most asset managers lack the conviction to make significant and continued investments in growth. There is also a broad consensus around the trends that are driving growth, but that consensus has not translated into proportionate business investments. While caution is understandable in times of market volatility, the reluctance to invest in growth was evident even in 2010, which saw double-digit cost increases, but only 2 to 3 percent of those increases directed toward growth.

• McKinsey developed seven quantitative predictions regarding how the industry might evolve in 2015, from growth in retirement solutions, retail alternatives and ETFs, to the pace of international expansion, the need for greater cost discipline, and the role of M&A and winning business models. While management teams may disagree about the pace and magnitude of these changes, the intent of these forecasts is to stimulate debate and greater conviction around a path forward for asset management firms.

• This report also presents a five-part management agenda with critical questions that every asset management executive team should consider as they position their firm for the years ahead.

Over the past decade, management teams that made deliberate and informed choices about where and how to compete and invested in and executed on those convictions were much more likely to generate sustained growth and profitability. Volatility and uncertainty in the global capital markets, the regulatory landscape and the global economy will likely continue for some time. While asset managers will need to recognize and respond to these uncertainties, they will also need to be more deliberate about where and how they pursue growth.

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