Niche investments and technology are among the keys to success in global asset management in 2017, according to a new report from Cerulli Associates.
The Global Markets 2017: How to Succeed Internationally report finds that fee compression and the need for specialist advice are changing the complexion of the asset management sector.
“The traditional distribution model is changing and managers must invest in technology and product development to stay relevant,” said Barbara Wall, Europe managing director at Cerulli.
For example, market dynamics favor the growth of passives, but the larger passive funds get, the more inefficient they become.
According to Cerulli, active managers therefore have an opportunity to enter the lucrative passive space. However, instead of seeking to compete with the dominant passive players, the report suggests that active managers should look to offer niche investments such as fixed-income exchange-traded funds and strategic beta funds.
Another thing to consider with traditional models is millennials’ investment behaviors, according to Wall.
“Millennials (broadly speaking, those born after 1980) are becoming an increasingly important segment for fund houses globally,” she said. “They display different investment behaviors from the Baby Boomer generation, exhibiting a greater interest in environmental, social, and governance products, for example.”
Fee compression is another overarching trend globally, according to the report.
Price wars have erupted among leading ETF sponsors such as Vanguard, Schwab and BlackRock. According to the report, in the U.S. prices are near to or at zero and in Hong Kong, Value Partners is the latest sponsor to cut the fees on its smart beta ETF to 10 basis points. Cerulli expects to see more acquisitions, but success will be limited.
In Europe, the market for robo-advice and cyborg advice is forecast to grow exponentially over the next 10 years, according to the report.
“[Asset managers] must look at new ways to win clients and attract inflows,” the report states. “Cutting fees and improving customer engagement will go some way toward helping them achieve these goals.”
Managers cannot rely on market growth or revenue growth solely to support profitability, according to the report.
Cerulli expects mutual fund industry net revenues in the selected countries covered in its report to rise at a CAGR of 3.9% over the next five years.
Revenues are rising in key emerging markets such as Brazil (from US$2.9 billion in 2012 to US$3.8 billion in 2016) and India (from US$431 million in 2012 to US$902 million in 2016) and remain strong in the traditional centers of Europe and the U.S., according to the report. Cerulli expects mutual fund revenues to continue to increase in the U.S., even as the country’s share of the global total falls.
“Although revenue growth will be incremental in markets where passive products have grown exponentially, managers will find ways to protect their revenue streams, perhaps through M&A activity or by tweaking their distribution models,” the report states.