Mid-sized asset managers are approaching a ‘valley of death’ as large-scale companies eat up the share of the market and profit pool, according to a study by consultant Bain.
It predicts that while assets under management (AUM) in the industry is set to rise through to 2022, firms are set to experience a ‘sharp decline’ in profits.
According to Bain’s estimates, asset management companies have enjoyed an average compound annual growth rate (CAGR) of 7% for AUM since 2012, but their profits per asset decreased by a 2% CAGR.
Its model projects just a 4% CAGR in AUM alongside a sharp decline in profits per asset at a negative 7% CAGR.
Bain said the decline in profitability ‘has accelerated the demand for technology investments that will simultaneously offer new types of value-adding products and services to customers and increase process efficiency and scalability.’
But regardless of technology, it added that ‘weaker firms’ will find it harder to charge what they want or keep a lid on costs.
It classified such firms as ‘plain-vanilla’, smaller or mid-sized ones which have no competitive advantage.
Bain estimates that the spread in profits between the top 10 and bottom 10 companies will rise from 10 basis points in 2017 to 13 basis points by 2022, up from only 4 basis points in 2013.
This translates to a roughly €400 million profit difference for a mid-sized manager with €300 billion in assets in 2022.
It added that the estimated €81 billion global profit pool by 2022 will not have grown compared with 2007, making it difficult for weaker firms to grow or maintain market share.
Bain said: ‘The collapse of the middle leaves firms with two viable strategic directions as a means of escape from this valley of death.
‘One route involves going big, with two variations: Large-scale companies such as BlackRock and Vanguard have spread their costs over a broad, predominantly passive asset base to achieve a strong scale position.
‘Some firms, including Amundi and Fidelity, have large active investment portfolios with a broad range of products.’
The other route, it added, involves managers carving out a niche by focusing on a particular asset class, product, portfolio strategy or customer segment.
The full study can be accessed here.