Asset management sector doubles holdings to $79 trillion in 10 years

Asset and wealth managers had a strong 2017, as new funding entered their catchments, global markets boomed and new products were developed. The industry saw total assets under management hit a record $79 trillion, twice the levels seen in 2008.

The asset management industry has bounced back from the 2008 financial crisis in dramatic fashion. A recent run of bull markets has seen the total wealth under management climb steadily, boosting revenue, even while clients have become more discerning – pressuring margins as costs rise and fees become increasingly competitive.

In line with the global financial recovery, asset management has seen consistent growth in recent years. The globe’s 500 largest asset managers have added more than $30 trillion globally over the past decade, taking the total value of assets under management to above $80 trillion. Since 2010, the average profit margin of the top asset managers – including Blackrock, Vanguard, State Street Global Advisors, Allianz, Fidelity and JP Morgan Chase and BNY Mellon – has been relatively stable, with BNY Mellon, Fidelity and JP Morgan enjoying premium performance.

This growth may soon be impeded, however, as clients are turning away from active management toward passive vehicles which are increasingly accessible with returns with strong profiles. Asset managers also face challenges as digitalisation hits the industry, with various aspects of client relationships increasingly automated or performed by self-service, while implementation costs for new back and front-ends pile up. New analysis from The Boston Consulting Group has taken a broad look at the industry, in order to help address the challenges and opportunities facing asset managers.

Global assets under management grew a staggering 12% to $79.2 trillion in 2017. The market has almost doubled since 2008 when it stood at $39.3 trillion. The market was buoyed on multiple fronts, with strong equity markets on the one side, the influx of new wealth from developing markets, and new product offerings creating demand. Changes to market dynamics at the start of 2018, as well as a tumultuous year so far, are likely to see net inflow return to lower levels.

The retail sector noted a surge of growth, with the share of total assets under management (AuM) for the segment increasing from 37.5% to 39% – as net inflows increased to 5.3% in 2017 compared to 2% in 2016. DC pension plans saw a slight increase, up from 14.2% of total AuM to 14.5%. The insurance segment saw its AuM decline slight, falling by 1 point even on the back of 5% growth.

North America saw annual growth of 13%, with total AuM up from $33 trillion to $37.4 trillion. Europe saw more modest growth of 7%, topping $22 trillion, while Japan and Australia saw slightly more respectable double-digit growth to $6.2 trillion under management. China was the most significant addition to the wealth pile under management, as a relative percentage, at 22% to $4.2 trillion, while Latin America, even in the midst of political chaos, saw growth of 17% to $1.8 trillion.

Growth in China was bolstered by both retail demand, from high saving rates, and institutional investors taking a position in the market. Regulator activity to push investment away from the shadow banking sector has played a part in increased asset management product demand and resulting AuM. The firm expects the region to reflect Europe in market makeup, focused on affiliated partnerships with little room for independent players.

The study found that as of yet penetration of asset managers into developing markets has not yet happened, with many having relatively lower levels of total AuM as a percentage of total financial assets. Stronger regional governance will be needed to create stable environments in which asset managers can support developing market clients. While developing markets represent an opportunity, a number of developed markets, such as Japan and Austria, have relatively low levels of AuM compared to their relative GDP.

Asset managers, while boosting record levels under management, have seen the pie of active management, which tends to be the most valuable segment, shrink as a percentage of total product split – even as total assets under management in the segment in absolute terms have increased. In 2003 the active core represented 57% of total AuM; by 2017 it had fallen to 33% - with decline expected to 2022, when it will hit 27%. Passive has picked up considerably, from 9% to 20% over the same period, while alternatives have grown from 9% to 15%.

Global revenues stemmed largely from alternatives in 2017, followed by the active core, at 21%. Passives represented a small 6% of total revenues or $17 billion. Focus on developing higher margin industries will likely be needed to avoid increased losses of AuM to passives.

Renaud Fages, global leader of BCG’s asset management segment and a co-author of the report, said, “Asset managers would be wise to take advantage of a strong year to reinvest capital and talent in future growth. Most of the bounce-back growth of 2017 was market-driven, not structural. Cost pressures and fee erosion will persist, especially when equity market growth slows, as it shows signs of doing in 2018.”

Fellow co-author Qin Xu, leader of BCG’s asset management topic in Asia, added, “We expect China’s assets under management to triple by 2025, which – if it comes to pass – would make the Chinese market the second-largest after the US.”

Related: Digital is top priority for asset managers, but change is slowed by legacy IT.