The best of times, the worst of times: North American asset management

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Despite buoyant capital markets and an unexpected regulatory pause, a pall fell over the North American asset management industry in 2016 as flows turned negative, a growing number of active managers underperformed their benchmarks, margins compressed, and aggregate industry profits retreated. Although 2017 has shown indications of an uptick in industry performance, a mood of pessimism continues to prevail. The inconvenient truth for asset managers is that strong secular trends—a moderation in long-term investment returns, an aging demographic shifting from an accumulation to withdrawal phase, the runoff of large pension funds, and pricing pressure driven by passive investments—are now firmly in control and will weigh on the industry for the next 20 years. Welcome to the new abnormal of asset management.

These secular trends are widening the gap between top and bottom performers. Today, the difference in profitability between the top- and bottom-quartile managers stands at a remarkable 42 percentage points. For the first time since the depths of the financial crisis in 2009, more funds closed or merged than were launched last year. Interestingly, and counter to some conventional wisdom that predicts an inexorable shift towards scale, our research finds winners and losers across institutions of all sizes. The greatest predictor of success has not been size, but focused execution to capture share in the most important pools of value in the industry.

Many in the industry now predict, and we believe correctly, that these factors will drive a wave of consolidation. But consolidation will take a different form than many assume—instead of mega deals aimed at creating scale efficiencies, large and medium-sized firms alike will make targeted acquisitions to add capabilities, and struggling managers of all sizes will shutter due to their inability to meet the industry’s rising bar.

These secular trends are not only affecting the industry’s economics, they are contributing to a fundamental change to how value is distributed both across and within major asset classes. This redistribution has been steadily under way for a decade but is near a tipping point as two investing trends take root with clients: risk-based asset allocation that cuts across asset classes and factor investing that identifies additional drivers of value beyond the market capitalization-weighted indices of “standard” passive investing. These innovations are reinventing the very art and science of portfolio construction and the underlying drivers of product demand.

This is not all bad news for asset managers. A rising bar for the industry is causing underperforming rivals to fall by the wayside. A shift in investment paradigms is opening clients’ minds to new innovations that cut across asset classes. This in turn is leading to a radical shift in how clients invest—for example, private equity now increasingly competes directly with public equities and credit with fixed income. Moreover, technology creates an unprecedented opportunity to improve both client experience and manager efficiency, which stands to create new sources of competitive advantage for firms that embrace technology in the right ways.

In short, asset managers with the right operating models and value propositions have a once-in-a-generation opportunity to drastically improve their competitive position, capturing additional clients, assets, and market share. For North American asset managers, it is truly the best of times and the worst of times.

This report draws on McKinsey’s ongoing research into the asset management industry, including insights from McKinsey’s 17th Global Asset Management Survey, which gathers benchmarking data from more than 300 asset managers—more than 100 from North America, representing $30 trillion (80 percent) of assets under management (AUM)—as well as McKinsey’s annual Global Growth Cube data, which provides a granular breakdown of historical and forward-looking AUM, revenue, and net flow data for 42 regions and countries, 9 client segments, 15 asset classes, and 5 product vehicles.

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