Europe’s asset-management industry enjoyed its ninth consecutive year of record performance in 2017: assets under management (AUM) rose by 8 percent, to €22.5 trillion, one of the best showings since the financial crisis. The global industry reached new highs as well, powered by strong performance in many of the world’s stock markets (Exhibit 1). For Europe’s asset managers, net new inflows from clients came to €581 billion, 3 percent higher than those of the previous year—complemented by a 5 percent gain from market performance. Overall AUM growth was in line with the average 8 percent pace of the past few years (Exhibit 2).
Typically, institutional investors (70 percent of the European industry’s AUM) have propelled growth from net flows, but in 2017 the inflows from the retail sector reached 5 percent, versus just 2 percent from institutional clients. Across Europe, most country markets enjoyed strong new cash flows. Large contributions came from the United Kingdom (5 percent gains from retail and 4 percent from institutions) and Germany (7 percent and 3 percent, respectively).
Peak AUM levels carried through to the European managers’ revenues and earnings, which set records in 2017. From 2007 through last year, average AUM increased by 62 percent overall, revenues by 56 percent. Profit margins among Western European managers rose to 13.0 basis points of average AUM for the year, up from 12.1 in 2016. Measured against net revenues, profit margins reached 37 percent (Exhibit 3). Profitability in most country markets was higher as well, and some surpassed their pre-crisis high-water marks: in Germany, for example, profit margins hit 18.3 basis points of AUM, versus 16.9 in 2007.
Europe’s asset managers achieved these numbers despite significant shifts in the industry’s economics. Both institutional and retail clients have increasingly migrated away from traditional actively managed strategies, and that has gradually eroded the revenue margins of asset managers. And while their costs continue to rise in the aggregate—particularly at the compensation line—the considerable expansion of the managed asset base helped drive down cost margins. Still, the industry remains vulnerable to a significant downturn in markets.
Looking ahead, the industry faces three important long-term dynamics: the continuing shift away from traditional products to lower-cost options (for instance, from active to passive) and to alternative asset classes, the changing expectations of both retail and institutional clients, and the impact of data and advanced analytics on the full investment-management value chain.
From the current position of strength, forward-thinking asset managers have many strategic options to meet these client and market forces head on and to increase the bottom line significantly. In view of the three long-term market trends, they should also consider the following tactical moves to complement their strategic positioning:
- expanding digital modes of delivery, strengthening branding, and broadening product sets via go-to-market models that personalize offerings and advice, thus creating a whole new experience
- investing in innovative investment processes that take advantage of new data sets and analytical techniques and broadening investment teams
- gaining a greater understanding of cost drivers and breaking the traditional link between AUM growth and costs
- implementing advanced analytics across the entire value chain—outside the investment process as well—to create a significant upside through higher revenues and lower costs
- strengthening the “execution muscle” to transform the business model
Three clusters of European asset managers have pulled away from their competitors and realized significant growth through new business and higher profitability. The first consists of at-scale firms with broad product lines, extensive marketing, global client relationships, and very low-cost structures. From 2015 to 2017, these firms earned profit margins of 55 percent on net revenues. The second cluster, of customer-focused marketers, earned profit margins of 42 percent against net revenues by gaining an intimate knowledge of customers and providing superior delivery through intermediaries or, increasingly, digital or even direct means. Firms in the third cluster, the alpha generators, which aim to generate superior portfolio returns through innovative investment processes, earned profit margins of 35 percent on net revenues. The rest of the managers are stuck in the middle strategically, consigned to the bottom ranks of profitability, with profit margins on net revenues of just 21 basis points, on average.
In recent years, the gap in AUM growth and profit margins between top-performing European asset managers and the rest of the industry has been growing. Firms should therefore tune their strategies toward one of the winning business models, though large managers with strong resources can draw on elements of all three. Moreover, asset managers have a range of options, and astute choices will ensure that leaders maintain their competitive positions and that innovators can move into the upper ranks of growth and profitability.