The North American asset management industry has hit a speed bump in 2022 as a result of the market slowdown that has forced a reset of expectations, a new paper from management consultant McKinsey & Co. says.
In the paper, "The Great Reset: North American asset management in 2022," the authors said the "great reset" of macro, market and policy assumptions is forcing the industry to ask which elements of the slowdown are part of a "new normal."
Ju-Hon Kwek, senior partner at McKinsey & Co. and one of the four co-authors of the paper, said in an interview that this year has represented "in some pretty fundamental ways a bit of a regime change of what we've seen in the past 13 years. When a (bull market) cycle goes on for 13 years, I tend to think the industry builds their businesses under the new normal."
During the past 10 years specifically of what Mr. Kwek termed "supernormal" returns, costs in North America have grown by more than $71 billion. The paper asks that while the asset management industry's costs have been variable on the upside, how flexible are they on the downside?
Mr. Kwek said some measure of belt-tightening is inevitable, but it's an interesting time in the industry because "belt-tightening does not get rid of $71 billion in costs."
According to the report, the four areas that stand out in terms of the increase in costs are investment management, which accounts for $28 billion in increases, a third of which is attributable to increases in investment professional head count alone; management and administration, which accounts for $12 billion and reflects an increase in senior business leaders guiding increasingly scaled firms during a period of greater complexity and stratospheric growth; and technology, which accounts for $11 billion.
Mr. Kwek said a "cleaning of house in the industry" may be on the minds of asset managers, bringing back discipline and scalability. "Do we need to do more than just belt-tightening?" Mr. Kwek asked.
The "great reset" to which the paper refers has come after another record-setting year for the global asset management industry.
The paper noted that global assets under management as of year-end 2021 reached an all-time high of $126 trillion (a 9.9% increase from $114.7 trillion at the end of 2020), due both to extraordinary market performance and strong net new flows from clients.
The paper said for the first half of 2022, about 35% of fund managers were able to build on the positive net flows for the previous year. This population consisted of large, diversified firms with a breadth of offerings able to meet client needs, passive managers that gained assets from rebalancing and repositioning trades, and firms with proprietary distribution channels.
Despite the challenges of 2022, the paper also noted that the trends that have dominated the last decade look set to continue. Mr. Kwek cited the growth of passive assets, exchange-traded funds and private markets as sea changes that seem set to continue.
"2021 was the single largest growth year in history for ETFs, and this year it looks like it's going to be the second largest year," Mr. Kwek said. "2021 was absolutely the high-water mark for private markets. Fundraising (this year) is down $100 billion but it's still clocking in at $700 billion. The persistence of those trends is quite interesting."
