|
American Banker
David Hunt and Rick Wurster
July 15, 2005
The news that Citigroup and Legg Mason have agreed to swap their respective asset management and brokerage units - doubling Legg's size and making it one of the world's largest money managers - has prompted serious reflection throughout the asset management world.
And for good reason: The level of merger-and-acquisition chatter in the industry today is high, and the Citi-Legg deal has definitely upped the volume. Now many senior management teams are wondering whether becoming megasize is the only way to succeed and stay successful in the asset management business.
Our research clearly indicates it isn't.
Since 2001, McKinsey and Institutional Investor's U.S. Institute have benchmarked the performance of more than 60 firms that collectively manage assets of more than $5 trillion, or about one-quarter of the industry total. Our analysis has covered revenues, costs, profit margins, and growth at the firm level and by product category.
After a full market cycle, we have found that three distinctive winning strategies have emerged in the asset management business - and being big is only one of them.
No question, operating on a large scale has proven to be an effective strategy for many firms. But outstanding long-run returns can also be attained by smaller outfits that operate as multiboutiques or emphasize particular asset classes.
So what separates the most successful players from the rest of the pack? They have a clear understanding of the different cost economies of scale in the asset management business.
Firms pursuing any one of these three strategies have been - and will likely continue to be - twice as profitable as those that aren't:
- At-scale firms - those with $100 billion or more of assets under management - as a group have consistently produced profit margins topping 30% since 2001. Firms following this strategy enjoy cost advantages over smaller competitors in every function, with the most pronounced benefit arising from the investment management area.
- Multiboutique players have the ability to diversify investment styles, have achieved scale within a targeted set of asset classes, and have leveraged those economies of scale across such functions as sales, distribution and technology. For instance, the institutional sales productivity of these firms is more than 50% better than the average similar-size firm. In 2004 the multiboutiques in our benchmarking survey generated an impressive average profit margin of 36%.
- Focused-asset providers - firms with at least two-thirds of their assets in either fixed income or equity and $2 billion or more per product vehicle - have also achieved scale within their targeted asset classes. They have successfully balanced the need to grow into new products and client segments with smart product-mix management to maintain that scale advantage. The result: above-average profitability throughout the cycle, with average margins of 34% in 2004.
The flip side, of course, is that we see real challenges ahead for asset management firms that do not fall into one of the above strategic categories - "stuck-in-the-middle" players, as we call them.
Neither large nor focused, these firms have assets under management of $45 billion on average and about $760 million per product strategy - less than half that of the industry norm. They must spread their resources across a diversified set of asset classes, resulting in higher costs and lower productivity than their peers.
Over the recent market cycle the profit gap between winning and losing firms widened considerably. In 2004, for instance, the industry as a whole generated an impressive average pretax margin of 28%. But the stuck-in-the-middle group generated profit margins of only 18%.
With the battle for assets and the acquisition pace intensifying, executive teams in the asset management industry have their work cut out for them.
–
Mr. Hunt is a partner in McKinsey & Co.'s New York office and heads the firm's wealth management practice. Mr. Wurster is an associate principal in the Boston office.
|
 |
|
| | Financial Services Practice | |
| Books | |
| |
|
|
