The financial crisis and the low/no return environment that has followed have taken their toll on the European asset management industry. Recent research from McKinsey & Co. finds overall industry profitability declining by a third from the 2007 peak of €13bn to €8.6bn in 2011.
Low returns have obviously hit lucrative performance fees and also slowed growth of assets under management, which is important when the fees you charge – and thus your revenues - are a percentage of AUM. New inflows of assets have also slowed, with mutual funds losing market share among retail investors. Funds now account for just 12% of personal assets compared to 14% a decade ago.
At the same time, the industry has not learned how to control the other side of the profitability equation – costs. McKinsey finds that the industry-wide cost-base is still at the level seen prior to the financial crisis and the cost-income ratio hit 65% in 2011.
However, not all asset managers are in the same boat. The top quartile of fund houses increased their share of industry profits from 50% to 58% from 2007 to 2011. There are a couple of reasons for this. Inflows from retail investors may have declined but they are also becoming more concentrated, and a handful of houses also dominate the institutional market.
It is mainly mid-sized and bank-owned managers that are feeling the squeeze. Independent houses have benefitted from private banks increasingly using open architecture for their fund offerings. Some have also jumped on the passive investing bandwagon, profiting from the investors who realise the low likelihood of active managers actually outperforming the market.
What does this mean for European investors? Lipper research found there were still 2,749 new fund launches across the continent in 2011, although that was down from 3,311 in 2010, and the number of funds that closed or merged rose from 2,989 in 2010 to 3,471 in 2011. So the net number of funds available for sale in Europe fell by 722 during 2011. Not all of the drop is due to poor performance - passporting rules introduced under Ucits IV mean there is less need for mirror funds in different jurisdictions.
Whatever way you look at it, there are still a lot of funds on offer to European investors. If investors are making good choices and taking their assets to the best performing fund houses, it’s hard to feel sorry for the asset managers that are losing out. However, the McKinsey research does not look at the performance of the houses gaining assets and investors do not usually have the best track record in picking future winners. But I have a feeling that would need to be the subject of another blog!
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