Testing the industry’s bullish consensus about AUM growth.
The Bloomberg Intelligence and Simmons & Simmons Asset Management Outlook to 2025 report tests the industry’s bullish consensus about AUM growth. The report’s headline findings suggest that recent, optimistic predictions for the industry aren’t validated by the expectations of asset management professionals.
AUM growth is expected to be strong but not stellar at 21% in the next five years and, given the forecasts for global GDP growth at around 3% during that period, the savings multiplier isn’t expected to significantly reverse its current downward trend.
The survey also shows that asset managers think changing savings habits will impact the industry in a number of ways. Those may be driven by shifting generational factors – as Millennials become a larger part of the client base and Baby Boomers’ participation reduces on a relative basis.
However, respondents do seem to suggest that this recent decline in saving rates does not signal a global recession as it has done in the past. Indeed, the survey suggests that the risk to those forecasts for AUM growth in the years to 2025 is skewed to the upside: respondents signal there could be better performance if short term risks from trade wars and conflicts in particular pass without a significant impact on growth and savings.
Another major finding of the survey is the unambiguous signal that the industry expects continuing pressure on profitability. Respondents expect margins to be just 89% of current levels by 2025. The major drivers of these shrinking margins are competition (both from new entrants and existing competitors), as well as the greater industry transparency around fees and costs being driven by new regulation.
Technology is seen as a double-edged sword: while it clearly has the potential to lower costs and boost revenues in the medium term it also represents a significant short-term cost that needs to be absorbed and managed. Those technology investments are also seen as exacerbating the industry’s shifting cost base towards middle- and back-office functions and away from traditional front-office functions.
Perhaps surprisingly, given this expectation that automation will shrink the relative weight of traditional portfolio management for asset managers in the future, respondents expect a shift to better margin investment products and strategies in the coming years, and also express hope that asset growth will help boost revenues.
Given the industry’s recent shift to lower cost, passive products and increasing automation, the expectation that clients will start allocating to higher margin business – active investment strategies and alternative assets – could be seen as an expression of hope over experience.
However, the survey finds some evidence to suggest an increased allocation to higher fee-based investments could happen between now and 2025. The long-term rally in bonds could be near a secular and cyclical turning point at which investors re-allocate to assets – such as equities – for which active managers are historically well suited to generate alpha.
Respondents also suggest that the industry hopes to increase profitability by expanding into new geographies and products. New funds directed at infrastructure, for example, will offer strong returns for investors and the ability for asset managers to differentiate in terms of their offering and performance, but at the cost of investing in the necessary expertise.
The survey also points to strong expectations from ESG investments. The AUM of investments focused on these ethical and sustainable assets is expected to grow much more quickly than traditional funds – thanks largely (but not exclusively) to demand from Millennials. Given the lack of industry standards around ESG, there will be a significant opportunity for active management in this segment and the survey clearly shows that the asset management industry is focusing on this area for both AUM growth and margin resilience.
In some ways the survey’s findings around the impact of Millennial savers on asset management is a microcosm of the industry’s entire challenge: potentially slower AUM growth but an opportunity to arrest margin declines. The strategies that asset management companies and the industry adopt to meet these challenges will be fascinating to follow – and will be tracked in detail by future surveys from Bloomberg Intelligence and Simmons & Simmons.