Specialist business models for asset managers

Although asset management is considered the most consistently profitable business in financial services, there has been extreme volatility in the degree to which individual firms capture profits.

Research indicates that top performing asset managers generate profit margins of approximately 45%, compared to margins of 5-7% for poorly performing firms. And the operating environment is becoming more difficult for asset managers, as firms experience pricing pressure due to increased competition and increasing operational costs driven by regulatory and technological change.

However, asset managers in Asia are in an enviable position relative to their peers in Western markets. Assets under management in Asia have grown at high single-digit rates and are predicted to continue to increase. But even with strong market conditions, cost increases often outpace growth from market appreciation.

Therefore, it is critical that asset managers position themselves to capture growth from net new flows rather than existing sources.

Over the past few years, many industry commentators suggested that obtaining scale was the key to performing well, but recent findings suggest that a firm’s choice of business model and operational discipline play a much larger role.

It is estimated that M&A activity accounts for less than 10% of growth in assets under management for the industry, and that net new flows contribute twice as much to growth as market appreciation.

Therefore, it is critical that asset managers in Asia structure themselves to capture net flows and operate efficiently. Financial technology firms have a unique point of view into a wide variety of asset management operations, in Asia and beyond, and one common element I’ve observed among successful firms is that they specialize - meaning that more than 50% of their assets are focused on a single asset class or type.

In Asia, firms typically specialize by offering regionally tailored product portfolios, and running regional operations to support their commercial endeavors.

This makes sense, because the region itself is outperforming, as savings rates outpace those in Western markets and U.S. and European investors look to Asia for both better returns and increased diversification.

As the retail market grows in the region, consumers are demanding products tailored to local needs. Research indicates that asset managers should be investing heavily in the region - some industry commentators suggest that firms should plan for 50% of future growth to come from Asia alone.

Of course, there are other niches that Asian asset managers can pursue instead of regionalization. For example, I’ve observed substantial interest in alternatives and ETFs, and retirement markets have strong future prospects as wealth in Asia rapidly increases. Alternatively, firms can pursue both regionalization and product specialization as strategies – but the key is to ensure investments in growth are focused and rationalized in order to generate meaningful returns.

Eventually, firms in the region will grow organically by pursuing these strategies, and will turn into what McKinsey dubs “at-scale global specialists,” defined as firms with greater than $300B in assets under management and over 65% of assets in a single asset class. But this is a vision for the region – in the meantime many predict that specialized firms with approximately $50B in assets and over 50% of assets in a single asset class or type will outperform.

Further, I see generalists of all types struggling to compete in complex, local markets across Asia. Many of the multi-boutique operating models are struggling to achieve organic growth, and large international firms who lack local expertise are failing to attract net new flows.

Global asset managers should learn a lesson from those firms who have successfully grown in Asia - to focus their commercial practices and their supporting operations to take advantage of the tremendous potential in Asia’s asset management markets. What business model trends do you see among Asia’s asset management community? I welcome your thoughts and comments. 

Matt Baldwin, Asia Managing Director, PORTIA