As recently as the period between 2011 and 2013, four in 10 of asset management firms were able to grow profitably. That’s becoming tougher in an environment of fee compression and widespread passive investing.
An industry study released Monday by Casey Quirk, a Deloitte Consulting practice, and McLagan, a unit of Aon, showed that between 2014 and 2017, only 25% of the asset management firms studied had found a way to invest in their businesses while increasing profits.
In contrast, 44% were investing in their firms but not seeing returns, and 31% were simply cutting costs and contracting.
Although revenue and profit growth are still highly correlated, increasing revenues no longer guarantee that profits will march in step, according to the study.
The study comprised 95 investment management firms headquartered in North America, Europe and Asia/Pacific, investing more than $35 trillion for institutions and individuals. The research included data from eVestment and Morningstar in addition to Casey Quirk and McLagan’s own analysis.
Profitable asset managers in the study increased median margins to 35% over the past three years, compared with their competitors’ 31%. Not only that, but the best-positioned asset managers also were often able to charge a fee premium that their competitors could not.
For example, firms that were able to increase margins and reinvest in their businesses typically commanded a 19% fee premium versus their competitors. Managers not in this group all experienced below-median fees for their products, between -2% and -7%, depending on their investment strategy.
In a statement, Casey Quirk said the asset management industry would continue to see winning firms that grow profitably and those that will lose out by only increasing revenues and not profits or by experiencing revenue contraction.
The study found that asset managers with a lower cost structure and higher efficiency per employee and that more sharply focus their efforts on in-demand investment strategies have experienced a 4.6% organic growth rate over the last three years.
In contrast, firms that have deliberately drawn down margins in order to fund reinvestment efforts have not seen any organic growth over the same timeframe. And firms that have cut costs without investing in their businesses have suffered a 2.7% decline in growth.