Another week, and another consultancy firm is warning that the asset management industry faces a crisis in the coming years. I’m starting to wonder whether the apocalyptic warnings about the future of money managers underestimate the plasticity of the world of investment.
The global fund management industry enjoyed record net inflows last year, with total assets increasing by 12 percent to more than $79 trillion, according to a report released this week by the Boston Consulting Group. That could be a last hurrah, as the report argues. Or it could be evidence that firms are adapting well to a changing landscape dominated by the rise of passive strategies and increased scrutiny from market regulators.
Rising stock markets have encouraged individual investors to add to their holdings, with the retail component of global assets under management increasing to 39 percent last year from 37.5 percent in 2016, according to the report. The higher fees typically levied on retail accounts helped to defend the industry’s profitability.
Those profits have been remarkably stable in recent years. But BCG, which surveyed 165 asset managers with $48 trillion of funds, warns that a decline in stock markets could reverse those inflows, triggering a drop in profitability. “At some point, a significant market reversal is likely, given the long period of gains that investors have enjoyed,” the firm says.
For sure, equities have already put in their weakest start to the year since 2011. The MSCI World Index is up by less than 2 percent, making it unlikely to match last year’s gain of 20 percent. But if BCG really has faith in its ability to time a stock market downturn, it should get out of consulting and into the investment business.
In the past five years, BCG estimates asset management firms have delivered total shareholder returns of 12.2 percent, handily beating the 9.5 percent delivered by companies in the MSCI World Index. That level of outperformance may prove unsustainable. But even if the squeeze on fees persists, so too will the trends that have driven the surge in assets under management.