But if things look decent at an industry level, there are signs of greater strain beneath the surface as money managers and clients alike grapple with higher rates and inflationary pressures for the first time in well over a decade.
For example, McKinsey's annual global asset management survey showed the gap last year between the profit margins of top- and bottom-quartile performers widening to 43 percentage points from 37 points in 2021.
Money managers with a breadth of offerings, a broad portfolio orientation and the ability to scale their winning strategies — whether they have only one such strategy or many — "have taken up a disproportionate share" of the money in motion over the last two years, said Joseph Lai, a New York-based partner at McKinsey as well as a co-author of the report, in an interview.
In a tougher environment, the number of firms that can comfortably anticipate organic growth will tumble, McKinsey executives said.
The broader industry proved fairly resilient last year in the face of a painful 11% drop in revenues, but if the business can be likened to an iceberg, it's "steadily melting for a number of folks in this industry," said Ju-Hon Kwek, a New York-based senior partner and a co-author of the report, in an interview.
If so, that's partly because the heat has been turning up after a decade or more where persistent beta gains allowed managers to be less than obsessive about bolstering their value propositions, said Lai. The bull market covered "a multitude of sins."
Even if there are market players today old enough to remember the last time money market yields stood at 5% and bonds contributed solidly to portfolio returns, the McKinsey executives said the current moment in market time should be seen as more "new normal" than "back to the future."
In a sense, "when cycles play out for a long enough time, they become structural" so it's not just a matter of changing mindsets for a generation of executives that has never experienced elevated rates or a sustained downturn, said Kwek.
Over the past 15 years, "you've had an entire part of the industry that's grown up around beta … around the availability of low-cost leverage," he said.
The industry isn't simply returning to the structural patterns of the past, agreed Lai. For example, "you have insurers now looking to partner with asset managers in unique ways, transferring liabilities to asset managers — both alternative and traditional — to create new structures to manage those assets," a development that could augur new waves of growth in the industry, Lai said.
Kwek said industry consolidation could be in the offing, not in the sense of a spate of mergers and acquisitions, but possibly a situation where a smaller number of players is disproportionately successful. That, he said, "is absolutely happening."
McKinsey's North American asset management report cited actively managed equities, a key market segment for a large swath of U.S. managers, as a prime example.
Looking at the period between January 2021 and June 2023, the report found that "only a small share of active equity funds were able to achieve positive net flows" — mostly funds with top-decile performance.
Still, the McKinsey report contended, the structural shifts required to adapt to a higher-rate environment should offer opportunities as well as challenges, with trillions of dollars of potential business likely to be put in play — a once-in-a-lifetime opportunity for managers capable of bolstering their value proposition after a long period where they faced little pressure to do so.
One such opportunity is cash, the McKinsey report said, noting that a record $600 billion has flowed into money market funds over the first half of 2023.
And with higher rates now making fee waivers — which managers of money market funds instituted to ensure positive returns in a zero-rate environment — a thing of the past, McKinsey estimated that manager revenues for investing those pools doubled over the first eight months of 2023 to $13 billion, not far behind other market segments such as multiasset funds.
Fixed income, with attractive yields now for the first time in years, is another growing focus for institutional and wealth management clients alike, said Kwek. "People are thinking about the asset class again in a new way," he said, adding that fixed income could account for the biggest chunk of the trillions of dollars of investor money likely to be put in play over the coming five years.
Elsewhere, for alternative market segments such as infrastructure and private credit, asset managers should continue to step in as banks step back, with the potential to play "a bigger role in the world of finance" amid what the report called a "once-in-a-generation transformation" of the financial markets ecosystem.
Another segment showing promising results: "vertically-integrated asset managers who actually have a direct relationship with clients," said Kwek. Such managers have garnered the lion's share of money in motion so far this year, he said.
Meanwhile, growing attention to the types of investment vehicles managers deploy could become an increasingly important key to organic growth going forward, the McKinsey executives said.
While there have continued to be outflows from actively managed equities, the story becomes a more nuanced one when the type of investment vehicle used is taken into account, the report noted.
For example, even as $1.6 trillion exited active equity mutual funds between 2018 and the first half of 2023, exchange traded funds, collective investment trusts and separately managed accounts garnered net inflows of $500 billion, the report said.
"Increasingly product and vehicle strategy becomes important," Kwek said, adding "part of the reinvention of active (is) not just going to be about investment strategy. It's going to be (choosing) the right vehicles as well."