The trends of long-term returns being moderated, an aging demographic changing to withdrawing from saving income, and fee pressure driven by passive investing are firmly entrenched within the asset management industry and are causing the gap between top- and bottom-performing North American active asset managers to widen, said a report issued by McKinsey & Co.
According to the report, "The Best of Times, The Worst of Times," the difference in profit margins between the top- and bottom-quartile managers is at 42 percentage points.
The report noted that top- and bottom-quartile managers came in all sizes. Ju-Hon Kwek, a partner at McKinsey & Co. and lead author of the report, noted that, when looking at what it takes to thrive in the industry, the managers that succeeded weren't necessarily the biggest — they were the ones that picked spots both in line with where the industry is headed and in line with what their strengths are.
"The idea that you can't be successful as a small manager is clearly wrong," Mr. Kwen added.
The report also notes there are two investing trends that are taking root with clients — risk-based asset allocation and factor investing. These innovations are fundamentally changing the way investors construct their investment portfolios.
McKinsey predicts that the money management industry will continue to see consolidation. However, that consolidation will take a different form than what most industry observers assume, said Mr. Kwek. Rather than large managers making large deals aimed at creating scale efficiencies, large- and medium-sized firms will make targeted acquisitions to add capabilities, while struggling managers of all sizes will close if they can't meet their clients' increasingly complex needs.
Asset management is a talent-driven business. So, putting two mediocre managers together just creates a bigger, mediocre manager, Mr. Kwek said.
"As a talent-driven industry, consolidation is hard," he added. "This is a case where one plus one equals less than two."
The report draws on McKinsey's ongoing research into the asset management industry, including findings from its 17th Global Asset Management Survey, which gathers benchmarking data from more than 300 money managers globally, representing $30 trillion of assets under management, as well as McKinsey's annual Global Growth Cube data, which provides a granular breakdown of historical and forward-looking AUM, revenue and net flow data.