Profits for asset management companies are set to fall by a third in the next three years, due to the threat of passive investing and market uncertainty, according to a new report.
Published today, by financial consultants McKinsey, the report warns that profits are set to dramatically decline by between 30 and 35 per cent for investment managers globally by 2018, unless companies change their actions.
Phillip Koch, head of European asset management at McKinsey, pointed that inflows radically turned at the beginning of 2016 following “macro-economic volatility in emerging markets, oil”, which, he says, has led to profitability already taking its first hits with a 10% drop in profits the first quarter of 2016 vs the fourth quarter of 2015.
As a result, McKinsey has warned that the future profits outlook for global asset management is muted. Koch warned that (this is) due to “forces at work” in the capital market environment with “expected fall in asset class returns, regulatory changes, competitive intensity, digital behavior putting 30-35% of profit pools at risk by 2018,” he said.
The report also highlighted that net outflows in Q1 of this year, reaching lowest levels since “disaster” year 2008.
And with “vast pools of assets still not managed optimally (more than EUR 7 trillion across Europe)”, Koch believes that to counter this likely development, cost cutting and potential new lower cost products are needed.
Managers must ‘stabilise their ships’
In the short term, asset managers will need to “stabilise their ships,” added Koch. He gave examples to help deal with the potentially troubled waters, such as “E2E cost management, pricing” and managers “setting a new course” with innovation in products/solutions and services, digital propositions cited as important.
He also pointed that “segment-specific growth strategies, new direct offering, mergers and acquisitions and new geographies,” needed to be implemented by firms to help alleviate some of the expected downturns.
“The tide has turned,” added Koch. “2016 will be a very challenging year. a lot of players simply hope to preserve what they have for a long as possible. But it is a different environment that they are now operating in.”