Active management not safe in the US But its chances of living longer are better in Western Europe, according to McKinsey & Company’s new report on asset management in Europe.
âFrom the point of view of the distribution of assets, between 2013 and 2018, Western Europe did not experience the same displacement of market shares through passive strategies as the rest of the world (and in particular the States -United). Active strategies still play an important role in capturing net cash flows, especially in fixed income and multi-asset securities, âaccording to the report released Wednesday.
While the switch to liabilities is not as extreme as in the United States, asset managers in Europe cannot ignore the trend. Pricing pressure is still strong and costs high, explains Christian Zahn, partner in Frankfurt and one of the report’s authors. Active management is supported in some countries like Germany by captive banking networks, Zahn said in an interview with Institutional investor. Banks and their internal advisers dominate distribution in the country. âIt’s always easier to push active. “
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Investors swap active funds for passive funds at rates that vary from region to region. Between 2013 and 2018, Western European investors invested â¬ 265 billion net in active equity strategies and â¬ 180 billion in passive stocks, according to McKinsey. Investors in the rest of the world have withdrawn more than 1.2 trillion euros from active equity strategies and have invested 1.7 trillion euros in passive equity funds. In actively managed multi-asset portfolios, Western Europe recorded â¬ 690 billion in net flows, with a negligible amount going to passive multi-asset.
Overall, uncertainty in global markets and macroeconomic factors such as â¬ 7.8 trillion in European bonds that have negative yields are straining the industry and investor confidence, the consultant says. . European managers’ assets, income and profits hit record highs in 2017, before being hit by tough markets last year. Then the markets swung again.
“Market valuations have since rallied strongly, with European assets under management reaching a record $ 22 trillion, although revenue and earnings for the year are unlikely to peak in 2017 “, wrote the authors of the report.
According to Zahn, âThe industry has lived on incredible market performance, but if you factor in the performance of capital markets and only look at new capital, you find that costs have grown much faster than revenues. . This is a key finding, âhe said. âOnce the capital markets get a little bit fuller – as you saw in the fourth quarter of last year – then that’s going to be a huge problem for the players. ”
McKinsey reported that, year over year, 2019 assets under management grew by about 10%, with the average manager increasing 3%. But the profits did not follow. McKinsey expects margins to fall by around 2 percentage points due to price pressure and rising overheads.
The authors of the report pointed out that MiFID II, the radical regulation of financial services, is having profound effects on the industry.
Distributors sort through their approved fund lists and raise performance standards, making it more difficult for asset managers to make sales. Large managers have also reduced brokerage research spend by 20-30%, replacing it with research from smaller specialty stores. MiFID II has made investors more sensitive to fees, a trend that is supporting the lower-cost ETF industry.
Asset management is under pressure, but McKinsey’s Zahn argued that managers also have the potential to disrupt their industry mid-transition. âThink about what else your end customer might want. For example, some distribution partners need to invest in digital, would it be possible for you to provide technology for your distribution network? ”
âWe are seeing asset managers taking more transformative approaches,â he said. âOne is to think about the 80% of financial assets that could be invested, but which are not in the industry, such as deposits and illiquid assets. âWhat types of solutions could you offer to attract these assets? “