A “major shift” among asset managers could “dramatically reshape” the industry, says a report released today by McKinsey & Co.
According to “North American asset management in 2018: The New Great Game,” overall, 2017 was a great year for asset managers as global AUM grew to $88.5 trillion, a new all-time high, and industry profits increased by 20 percent.
During 2017, North American managers took in a record $683 billion in new net flows, according to McKinsey, and grew their own profits by 20 percent to $44.5 billion.
Global growth was particularly strong across three of four major regions in McKinsey’s analysis, North America, Europe and Emerging Asia. The fourth major region, Japan and Australia, experience $121 billion in net outflows during 2017.
However, most of the growth in asset manager profits in 2017 was attributable to market appreciation, according to McKinsey, and rising costs combined with fee compression and growing demand for low-fee products took a $5.7 billion bite out of North American asset managers’ profits. Most of the organic growth was concentrated among the largest firms in the industry,
Throughout 2017, investors fled active and high-fee investment products in favor of mostly passive and low-fee products. Three of the fastest growing asset classes for the year were passive equities, passive fixed income and passive multi-asset funds, while the biggest outflows were from active equities. In other words, investors and advisors are largely fleeing asset classes and products offering the highest revenue margin to managers in favor of the asset classes and products offering the lowest revenue margins.
Investors aren’t just moving toward passive, low-fee funds, but they’re also rejecting loaded vehicles for ETFs and no-load mutual funds. No-load funds experienced $922 billion in inflows in 2017, while loaded funds suffered $268 billion in outflows, resulting in $3.3 billion less in distribution fees that would have been paid out to advisors or other intermediaries.
McKinsey found that competitive dynamics are shifting among North American asset managers as trends like fee compression, regulation and demographic change force changes in the industry. This shift has successful asset managers shifting from organizing around elements like asset classes and “well-defined functions” to more horizontal integration and alignment with the client needs.
For example, the divergence in organic growth between large asset managers and small asset managers has increased to 21 percentage points in 2017, up six points from 2016. Large, $1 trillion-plus asset managers generated over 80 percent of all positive organic growth in the industry.
The North American retail channel accounted for $540 billion of inflows in 2018, 80 percent of the $683 billion total, with most of the remainder coming from the corporate sector, accounting for $111 billion of inflows.