A worldwide study shows that asset managers made profit
margins on a scale not seen since 2007 before the market crash, with median
margins of 27 per cent.

The study, by Casey, Quirk & Associates, the management
consultancy, and McLagan, a compensation consultancy, covered 101 money
managers overseeing a total of $23 trillion of assets. The rise in margins was
driven by rising market levels during 2012.

Less positively, a relatively anaemic gain in net inflows of
1.2 per cent in 2012 – compared with a rise of 3.7 per cent in 2007 –
increasing fee pressure, and a widening economic divergence among firms
post-financial crisis point to growing industry challenges, the report said.
The study is called Performance
Intelligence: 2013 Survey Results.

The last few weeks has seen a raft of reports on the wealth
management and asset management sectors, many of which point to industries
challenged by rising client demands, heavy costs, a period of wafer-thin
returns on cash, and the competitive threats from new business forms and
technology. Among the organisations recently issuing reports have been RBC
Wealth Management/Capgemini; ClearView Financial Media (publisher of this website);
Boston Consulting Group, CREATE, and PricewaterhouseCoopers.

The asset management survey’s participants largely came from
the US Institute and European Institute, which are members-only forums set up Institutional
Investor’s conference division for chief executives at major investment houses.
Fieldwork consisted of surveys at privately held, publicly traded and wholly or
partly owned firms with assets under management ranging from below $50 billion
to over $1 trillion in assets.

“With annual net flows of under 1 per cent anticipated
through 2017 these findings, based on one of the largest industry surveys of
asset management economics, indicate managers must adapt and innovate to keep
up let alone to continue thriving,’’ said Kevin Quirk, partner at Casey Quirk.

Traditional investment offerings will continue to be
challenged, while outcome-oriented and higher alpha strategies will enjoy the
highest net flows, according to the benchmarking analysis. These include: hedge
funds; balanced strategies; global tactical asset allocation and multi-asset
class solutions; emerging markets debt; and global equities.

“In a slow growth environment, asset retention is crucial,
and winning firms stand out with more robust staffing in sales and client
service and operationally by aligning their economics for superior attraction
and retention of talent,’’ said Adam Barnett, head of the asset management
practice at McLagan.

Privately held and publicly listed asset managers enjoyed
the strongest revenue growth in the 2007-2012 period, expanding at average
annual rates of 8.4% and 7.0%, respectively, according to the benchmarking
analysis. Firms owned by larger financial institutions had average annual
growth rates of 4.3 per cent over the same period, while revenue at affiliates
of asset management holding companies declined on average 4.6 per cent.

Of the firms surveyed, those in the middle, with managed
assets between $50 billion and $200 billion, enjoyed the strongest rebound in
operating margins, to 32 per cent in 2012 from a low of 15 per cent in 2009,
and were most consistent in attracting net flows over the period 2007 to 2012.

“It’s abundantly clear firms must retool to take advantage
of market segment opportunities and changing investor demands, or risk losing
talent and market share to more adaptable competitors,’’ said Fred Bleakley,
director of the US and European Institutes.