Refusal to Adapt Is Killing Most Asset Managers

(September 14, 2012) — Dwindling assets in developed markets and a failure to adapt to investor demands has meant outflows for the majority of fund managers over the last 18 months, and research has found this is set to continue.

A study by Boston Consulting Group (BCG) found the majority of asset managers had failed to bring in significant new money over 2011 and a “winner-take-all” phenomenon was occurring for the few who had moved with the times.

“There are two business models best positioned to succeed going forward,” said Monish Kumar, senior partner and the global leader of BCG’s asset management segment. “One is the large, diversified asset manager with scale and expertise in multiple product, segment, and market/geography combinations. The second is the smaller manager highly focused on just one of those combinations and earning the right to win there.”

Supporting this thesis, BCG found actively managed funds declined in percentage terms last year, whereas passive, alternative, speciality asset classes, and solutions-based products grew. The consultants said the few companies that had adapted to the market shift had “benefitted disproportionately”, but most managers had failed to respond and had lost assets as a result.

Further problems for fund managers came in the form of falling assets in some of the major asset-gathering areas. Assets in North America registered no growth in 2011 and in Europe the level of funds lost half of the ground they had gained since the financial crisis began in 2007. Japanese and Australian assets declined by 3% and 2% respectively, while Middle East and South African assets only grew 1%.

Managers active in asset gathering in “new” markets stood to gain – Asian assets (outside Japan and Australia) grew 5% and in Latin America they grew 12%, BCG said.

The report warned the majority of fund managers that they were losing touch with their end clients and this downturn would continue should they ignore the trend.

Elsewhere this week, another challenge for fund managers was highlighted – this time in the shape of regulatory burdens that could destabilise the industry in Europe. The European Fund and Asset Management Association (EFAMA) said proposed regulation under the Alternative Investment Fund Managers Directive (AIFMD) could see companies unable to run certain functions from jurisdictions outside of Europe.

Claude Kremer, president of EFAMA, told journalists that the “letter box entity” clause introduced into the AIFMD was meant to avoid all investment and risk management functions from being outsourced to third parties leading to no control being left with the company. Instead, the clause could see large sections of asset managers’ personnel having to relocate to comply with the ruling. This could mean US equity managers working for a European fund manager would have to return to Europe from North America, for example.

EFAMA believes this would cause immeasurable damage and disruption to the industry and incur huge costs. It could also impair performance for investors.

However, Kremer said the level of support within the industry to overthrow the clause would likely see it thrown out before the directive is finalised and taken up by European Union member states. EFAMA is presenting evidence against the clause to the European regulator this month.