Crossing the horizon: North American asset management in the 2020s

The past 18 months have planted multiple seeds of disruption which are setting a dynamic new horizon of growth for the industry in the coming decade.

In this year’s report, we examine the impacts of the unusual macroeconomic environment of 2020 on the North American asset management industry. The real economy in North America has proved remarkably resilient. Last year began with a sharp COVID-19-induced drop in GDP and soaring unemployment, followed by a retreat into economic hibernation. But the pace, breadth, and magnitude of monetary and fiscal responses induced a sharp recovery by midyear, with US GDP recovering to 2019 levels by 2021’s second quarter. The bounce-back was even more pronounced in the financial markets: following a 34 percent fall in US equity markets in March 2020, share prices climbed steadily to hit 34 percent above their pre-COVID-19 highs by the end of August 2021.

The asset management industry was a beneficiary of this rapid bounce-back, with industry economics showing a record year in 2020: Based on sheer growth in assets under management (AUM), 2020 was the second-best year since the financial crisis, and the global industry reached an all-time high of $115 trillion. Moreover, growth went beyond asset appreciation: net new flows from clients clocked in at an impressive 2.7 percent of beginning-of-year AUM.

In North America, AUM rose 13 percent in 2020, including net new flows of 2.3 percent (well above the average of the five years prior). Organic growth was broad-based, with five of seven major client categories showing positive net flows.

Industry profits reached a new record of close to $73 billion (exhibit), despite an acceleration in the mix-shift to lower fee asset classes and vehicles in 2020. Fee compression ticked slightly higher to 3 percent, versus about 2 percent annually over recent history. Finally, the industry’s cost base grew $8 billion, at a faster pace than in the pre-pandemic years—6 percent versus a longer-term average of 4 percent. All in, revenues and operating profits grew 7 percent and 9 percent, respectively (relative to AUM growth of 13 percent).

North American profit pools grew by 9 percent in 2020.
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The gains of 2020 were not shared equally: as in years past, the tide of rising markets failed to lift all managers’ boats. Firms showing improved growth were a mix of large, diversified managers playing across investment styles and asset classes, and specialists focused on a particular asset class or set of investment strategies.

Compared with five years ago, the difference in growth and profitability between the best and the rest has grown. On operating margins, long-term net flows, and revenue growth, the spread between the top- and bottom-quartile manager for each measure has widened—particularly for long-term net flows and revenue growth.

This spread in performance is reflected clearly in the public markets’ valuation of asset managers. Multiples for traditional asset managers have been under pressure since 2018, uncoupling from the rising valuations of the broader S&P 500. However, the top quartile of publicly listed traditional asset managers trade on average at a premium of about 50 percent to the overall industry. Since 2018, multiples of firms specializing in private market investing have grown to command an even higher premium.

On the client and product front, 2020 surprised . . . with a lack of surprises. Net new flows remained resilient and longstanding product demand trends across asset classes, investment styles, and vehicles remained largely in place, or accelerated, in 2020 and 2021 to date. For example, active equities remained under pressure while fixed income continued to achieve broad-based growth.

From a vehicle standpoint, ETFs have been a clear winner. Net new flows into ETFs reached $508 billion in 2020, a record that was already exceeded in July of 2021—buoyed by exuberant equity markets, investor enthusiasm for new strategies being launched in ETF formats, and growth in the nascent active ETF market.

In private markets, fundraising roared back with renewed vigor after a brief hiatus during lockdowns. Investors express continued interest in most private market asset classes, in particular infrastructure, private equity, and private debt, as part of the search for alternative sources of return and yield in a lower-for-longer interest rate regime.

Amidst this picture of continuity, the pandemic and its second- and third-order effects have planted some important seeds of change for the North American asset management industry. Eight trends that have accelerated over the past 18 months will help set the new horizon of growth for the industry over the course of the 2020s.

  1. Thematic investing—giving investors access to opportunities outside of the traditional asset classes and industry sectors—has found a receptive audience with engaged individual investors and opportunity-starved institutions alike
  2. Sustainability—not just as a corporate social responsibility, but also as a critical consideration for allocation of capital and a source of returns
  3. The next act for ETFs—as a channel for revitalizing active management, spurred by investor demand for ease of access, tax efficiency, and active insight from asset managers
  4. Technology-enabled mass customization (managed accounts, direct indexing, fractional share trading)—broadening access to value propositions that have typically been the preserve of institutional and high-net-worth investors
  5. The rise of digital assets powered by an army of new retail investors unfettered by traditional thinking about investments, opening the door for institutional participation in new sources of return “outside of the box” and between asset class lines
  6. Emergence of “alternative alternatives”—broadening the private markets universe, including “core” and “opportunistic” approaches in private equity and real estate, and the rise of yield-oriented asset classes like private credit and real assets
  7. Democratization of private markets as a function of demand (retail and high-net-worth investors and their advisors searching for new sources of returns) and supply (large private market firms investing in retail intermediary distribution, innovation in product vehicles, and the emergence of fintech platforms focused on private markets distribution)
  8. Mainstreaming of digital distribution—accelerated by the pandemic, raising the bar for asset managers to deliver superior sales and service experiences to clients in all channels

Our conviction in the growth potential of the North American asset management industry has increased. If anything, the disruptions discussed in the full report (available for download on this page) expand the industry’s options. The addressable market for North American asset managers is massive: As of 2020, global financial assets totaled $422 trillion, of which only one-third is managed by third-party asset managers. The scale of the unclaimed space offers enormous possibilities to those asset managers that can deliver superior investment performance, as well as innovative solutions that meet changing investor demands. Asset managers seeking to thrive in this dynamic environment should adopt the mindset of an attacker rather than the defensive stance of an incumbent and reposition ahead of change.

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