Asset management trends: A return to consolidation

Inorganic growth may be an answer to volatility

In December 2022, Moody’s downgraded its outlook for the global asset management industry from stable to negative, citing factors such as:

An operating environment that has grown dramatically more volatile since central banks began raising interest rates and Russia invaded Ukraine and
A decline in industry assets under management (AUM) of over 15% during 2022 from a near high of $126 trillion at the start of the year.

Here’s what to expect next.

Volatility — and its downward pressure on AUM — should persist in 2023, as will rising operating costs and client demands for lower fees, according to a January Pensions & Investments article. Pricing pressure has been an industry challenge for years but worsened measurably in 2022 as inflation rose and the large market returns of previous years disappeared.

The likely result? Asset managers’ profit margins and their ability to grow AUM organically will continue to be a challenge — with no relief from traditionally more lucrative products, such as actively managed mutual funds. Their underperformance has led investors to flee to low-cost investments like exchange-traded funds (ETFs), another trend expected to outlive 2023.

On the upside, managers are expected to continue seeing organic inflows into ESG allocations this year, despite poor performance in 2022 compared with non-ESG funds.

Managers may continue to increase their ESG AUM, partly to satisfy the 80% of millennial investors who value ESG as their top investment priority, according to ESG Clarity. But millennials will not be patient forever. This year will be a bottom-line test for these assets, with investors expecting managers to vet them more carefully. Sustainable investments, like low-cost ETFs and private market funds, are positioned to attract the largest inflows in 2023.

But these organic sources of AUM seem inadequate to sustain asset managers against rising volatility, clients’ willingness to shop for better rates and returns, the rising cost of reliable data, and fintech’s theft of talent. To thrive, asset managers must take two steps in 2023.

First, the time has come for them to compete for talent by meeting workers at least halfway on flexible hours, remote work and ways to improve work-life balance.

Second, they must have a clear strategic plan to extract value from a new phase of industry consolidation. This is especially true for smaller and midsized managers with about $500 billion of AUM but without the benefits of scale, according to Moody’s.

M&A activity slowed in 2022 due to market uncertainty and the realization that scale for its own sake is not a foolproof survival strategy. The difference to look for this year is that asset managers should be more selective, looking for targets not just to grow their AUM but also to refocus their business models so they can benefit from the industry’s growth areas, such as ESG, wealth management, and alternatives, according to WealthManagement.