SA asset management industry must transform to thrive amid volatility

• 2022 was among the worst years for investor returns since 2008. Globally, Assets Under Management (AUM) dropped by 10% to $98 trillion. South Africa followed suit, with AUM dropping 5% to $190 billion. The Middle East and Africa (MEA) bucked the trend, however, with regional AUM growing 5% to $1.6 trillion – one of only three regions to see growth, along with Latin America and Asia-Pacific
• Boston Consulting Group’s 21st Annual Global Asset Management Report explores the five fundamental pressures for Asset Managers and three major themes that should top the leadership agenda in the years ahead: profitability, private markets, and personalisation

For much of the past two decades, asset managers’ revenue growth has been boosted by central bank policies that have helped drive global markets. But rising interest rates in 2022 caused both stock and bond values to plummet, and the asset management industry also suffered. Global assets under management (AUM) dropped by 10% to $98 trillion, the second-largest single-year decrease since 2005, according to a new report released today by Boston Consulting Group (BCG). South African assets under management followed the trend, declining by 5% to $190 billion.

BCG’s Global Asset Management 2023: The Tide Has Turned report examines the external and internal forces shaping the asset management industry—outlining fundamental pressures asset managers face—and details a transformative path forward for asset managers to get back to historical levels of profitability growth.

“The asset management industry has reached a turning point, requiring leaders to rethink the way their organisations operate if they want to return to the profit growth of years past,” says Arjan-Tim Ferweda, Partner at Boston Consulting Group, Johannesburg. “Global, regional and local markets are full of economic uncertainties, and technology is rapidly transforming the way financial services firms serve their clients. South African asset managers will need to embrace new ways to approach profitability, expanding into high-growth private markets and offering personalised products and services to meet investor demands and drive growth in a complex and pressured environment.”

Asset managers in South Africa and more broadly face five fundamental pressures that present a clear case for transformation:
1. Growth is no longer guaranteed since market performance has been the main driver of revenues: 90% of revenue growth since 2006 came from market performance – more than enough to offset higher costs, pressure on fees, and strong capital inflows into low-fee products. However, central banks are no longer engineering sustained market appreciation; they are trying to slow growth to combat inflation. As a result, revenue growth from market appreciation is likely to be significantly less, perhaps as little as half that of the past decade.
2. Passively managed funds are increasingly popular, but growth varies by region: although the US has seen the net flows into passive exchange-traded funds and other passive products roughly triple to 90% from 2010 through 2022, the global outlook is a different story and varies by region. South Africa’s asset management market continues to be dominated by active management and institutional clients, accounting for 60% of assets under management in the country. Insurance, the only institutional client segment, decreased by a single digit. In the retail sector, pensions – representing 60% of AUM, also decreased by a low single-digit. Mutual funds remain the second largest retail sector.
3. Asset management fees are headed down: pricing is increasingly being used as a differentiator not only for passive products but also within the overcrowded space of active products that are otherwise like one another, resulting in persistent downward pressure. Average fees have declined by more than 15% since 2010, a drop that erases $55 billion in revenues (given 2022’s AUM). Adding to the squeeze on profits are cost structures that are unfit for the current environment.
4. Costs are rising: since 2010, costs have generally risen in line with AUM growth, which created the impression that margins were stable despite the pressure on fees. However, from 2015 onward, costs as a share of revenue have increased – with the vast majority of costs related to personnel. Asset managers will need to reduce their cost base by at least 20% to maintain historical levels of profitability, which will require organisation-wide transformation.
5. The current approach to product innovation is not working: while the asset management industry has created an abundance of products to stand out in a competitive playing field, proliferation has not translated into meaningful innovation. Investors are choosing established products with reliable track records: 75% of global AUM in mutual funds and ETFs sit in products that are at least ten years old. Less than 40% of all products launched ten years ago are still offered, compared with 60% of all ten-year-old funds in 2010.

Transformative measures to return to historical levels of profitable growth

BCG estimates that given the existing pressures and market expectations, if asset managers stay the course, their annual profit growth will be approximately half the industry average of recent years (5% versus 10%). To get back to historical levels, asset managers will need to cut costs by 20% overall and shift their revenue mix to generate at least 30% of their revenue from higher-margin products.

The report outlines three major themes that should top the leadership agenda to survive and thrive in the years ahead:
• Profitability: South African asset managers should transform their approach to profitability. They can do this by understanding the expenses and drivers in each function and using multiple initiatives to optimise costs, rather than just slash expenses.
• Private markets: Firms should pursue high-growth alternative investments and the private market opportunities therein. Alternatives represented more than $20 trillion of global AUM as of year-end 2022 and accounted for half of the industry’s global revenues, generating more than $190 billion for the firms that offer them. This strong momentum is expected to prevail with a CAGR of 7% in alternative assets over the next five years. Firms aiming to enter the alternatives market can do so through four primary pathways: build in-house, buy multiple firms and use an affiliate or boutique structure, buy an alternatives firm and operate it independently, or establish partnerships.
• Personalisation: Asset managers should harness the technologies that make highly personalised client experiences and products possible. New technologies can boost personalisation efficiency and effectiveness in the sales and marketing process, potentially leading to an increase in sales conversions of about 20% relative to traditional approaches.

“It is more important than ever for asset managers in South Africa to transform and build more innovative organisations – but the good news is that the path to transformation is clear and imminently achievable for most. Those who act now are the ones most likely to survive and thrive in the decade ahead,” says Ferweda.

Download the publication here.

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