EconomyDecember 1, 2023

How Bad Was 2022 for Asset Managers? Assets Dipped 10%

Thus far this year, the recovery is muted, a McKinsey study finds.

Reported by Larry Light

Last year was a bummer for asset managers, with assets under management dropping 10% and profit margins off five percentage points from 2021, according to a McKinsey & Co. study, and the recovery in 2023’s first half was muted.

Escalating interest rates—the key impetus for 2022’s suffering in stock and bond markets—as well as this year’s volatility, mean the asset management “industry is undergoing structural adjustments,” the report found. A substantial chunk of allocators’ AUM is run by these managers, although less than in the past.

Hardest hit were equities with stronger net outflows of assets from active managers, accelerating a trend that had been brewing for a while. Some of that money went into low-fee index funds.

For fixed income, assets also fled active managers last year and inched back a tiny bit in this year’s first half. Fixed-income passive strategies’ inflows remained positive for both years. The big gainers, both in 2022 and 2023, are private alternatives: private equity, private credit and the like.

Meanwhile, there is an “increasing wedge between the industry’s haves and have-nots” among asset managers, McKinsey stated. Only 29% of asset managers generated positive net flows in both 2022 and the first half of 2023, as the portion of struggling firms increased to 42%.

Profit margins have declined, although, relative to many other industries, they are still rich. Last year, pretax operating margins fell to 34% from 39%. No numbers were available for 2023.

The study termed the state of the industry as “down but not quite out.” The 10% falloff in AUM last year is far more than in past contractions, it contended. Some of the problem is an inflexible cost structure, the report noted. The industry’s cost base shrank only 3%, not enough to offset the margin drop.

One antidote, in McKinsey’s eyes: “Asset managers need to modernize their distribution, making sales and marketing a competitive differentiator by using non-traditional data, digital tools and gen AI for certain tasks.”

Asset managers will rise again, McKinsey averred: The industry downdraft “presents an unparalleled opportunity for asset managers to expand their roles as financial intermediaries.”