Net inflows in global assets under management has been slowing in the past three years, indicating a potential structural shift that could impact profitability for years to come, according to McKinsey & Co.'s annual money management survey.
The total global AUM was estimated to be about €38.2 trillion ($47.7 trillion) at the year-end 2011 compared to $38.1 trillion as of Dec. 31, 2008. Net inflows over the past three years averaged an increase of 0.6% annually, compared to the 2002-2004 period, when net inflow increases ranged from 3% to 5%, according to the survey.
“The asset management industry appears to be in the midst of cyclical change,” according to a McKinsey analysis of the survey's results. “Growth since the financial crisis has come almost exclusively from market appreciation, as opposed to net flows, making the industry more vulnerable to volatility.” Global AUM has also fallen as a percentage of global financial assets, to 22% in 2011 compared to 25% at the end of 2007.
However, money management remains relatively attractive with an average return on equity of 13.5% at the end of 2011. In comparison, ROE averaged 8.1% for the insurance sector and 5.1% for banking during the same time period.
“In an era of elusive growth and dampened profitability, strategic decisions concerning where and how to compete have never been more important,” according to the analysis of the survey.
Seven growth trends set to reshape the money management sector were highlighted in this year's survey.
- Inflows to emerging markets should continue to outpace those to developed markets at an annual rate of 6.4% vs. to -0.5% in the past four years.
- Investors are also expected to further shift away from domestic equities into global strategies.
- In fixed income, managers will either need to focus on “slow-growing core categories … or invest to build or acquire capabilities in fast-growing categories” such as long duration credit, the analysis said.
- Assets managed in exchange-traded funds, which have grown by about 30% annually over the last decade to about $1.5 trillion at the end of 2011, could again double as early as 2016.
- Alternatives are expected to continue gaining market shares due to an increase in retail investor interest, convergence of asset classes and investment products. A move toward absolute return from relative return benchmarks is expected.
- Money managers' solutions businesses, which encompass strategic advice and other services spanning across asset classes, will also grow.
- Managers, particularly in Europe, will need to upgrade their distribution strategy in order to maintain or gain market shares in the retail sector.
McKinsey's annual survey and related analysis combined data from McKinsey's proprietary fund management sector model and an annual survey involving more than 300 companies with an aggregate €19 trillion in global AUM.