(Reuters) - Despite cushy profit margins, asset managers must look to new areas such as retirement products and exchange-traded funds for growth as flows to their traditional equity funds stall out, a new research report found.
Scheduled to be released on Thursday morning by consulting firm McKinsey & Co, the report lays out stark alternatives for fund companies even as many have ridden a wave of rising assets to manage.
But often the asset growth has come from rising stock markets, and not because firms have found new ways to bring in cash from investors.
“Market appreciation is now the lifeblood of the industry - an unstable foundation on which to move forward,” the report warned.
Moreover, the sector’s profit margin was 28 percent on average in 2011. That would be the envy of many other industries. But the figure lags its 2007 level of 33 percent. Also, the gap between successful and unsuccessful firms is widening, the report found.
The best-positioned companies are those that have steadily invested in growth areas like alternative funds, retirement products or vehicles like exchange-traded funds, said Salim Ramji, one of the report’s lead authors.
“What the industry needs to do is find those sources of new flows,” Ramji said in an interview. “The sources of flows are very different than what they have been in the past.”
McKinsey’s report did not name any specific fund companies.
But its broad conclusions match those of other high-level reviews of the asset-management industry that have noted faltering flows and steady gains by just a few companies.
“The result is an acceleration of a winner-take-all trend that is redefining the industry landscape,” wrote the Boston Consulting Group in a separate report issued in September. Earnings that fund managers have reported so far for the third quarter ended September 30 have borne out this trend.
Several larger or more specialized firms reporting steady inflows like Affiliated Managers Group and T. Rowe Price Group. While others like Legg Mason Inc posted continued outflows from their once-profitable equities funds.
Spooked by volatile markets, retail investors have moved out of the equities funds that have been among the companies’ most profitable, and into index funds and bond products with lower perceived risks.
“Asset managers are trying to convince retail investors to reallocate toward risk via stepped up advertising/marketing campaigns, but active equity is still under pressure,” wrote Goldman Sachs analyst Marc Irizarry in a report on the quarter issued Wednesday. Passive funds, he wrote, are “dominating the discussion.”
For their report on the North American funds industry the McKinsey authors surveyed more than 100 firms, with $15 trillion under management, or about two-thirds of the region’s total managed assets.
The report found three growth areas - passive products, “solutions” products like retirement funds, and alternative funds - took in $1.3 trillion in new customer cash from 2008 to mid-2012.
In contrast, $670 billion flowed out of actively managed equity funds over that period. Bond funds took in $602 billion during the period, the report acknowledged, but that trend is likely to reverse as the economy improves. (Reporting by Ross Kerber in Boston; Editing by Leslie Gevirtz)