the state of the european asset management 2017/media/mckinsey...the state of the european asset...

Global Wealth & Asset Management Practice

The state of the European asset management industry2017

Authored by:Cristina CataniaFelix GermannChristian Zahn

1The state of the European asset management industry 2017

The European asset management industry addedto its string of record achievements in 2017, hittingnew highs in assets under management (AUM)—€22.5 trillion at year end—revenues, and profits. Asin the past few years, most of the AUM increasehas been driven by rising prices in the world’sfinancial markets. New client flows dropped fromthe record levels of 2014 and 2015 but were stillhealthy at 3 percent of start-of-year AUM.

Europe’s asset managers achieved these recordsdespite significant shifts in the industry’seconomics. Both institutional and retail clientshave increasingly migrated away from traditionalactively managed strategies, resulting in agradual erosion in asset managers’ revenuemargins. And while managers’ costs continue torise in the aggregate--particularly at thecompensation line—considerable expansion inthe managed asset base contributed to lowercost margins. Still, the industry remainsvulnerable to a significant downturn in markets.

Looking ahead, the industry faces threeimportant long-term dynamics: the continuingshift away from traditional products to lower-costoptions (e.g., from active to passive) or intoalternative asset classes; changing expectationsof retail and institutional clients, calling for a re-engineering of investment distribution and theinvesting experience; and the impact of data andadvanced analytics on the full investmentmanagement value chain.

From their current position of strength, forward-thinking asset managers have manytactical options to meet these client and marketforces head-on, and add significantly to thebottom line.

Expand digital modes of delivery, strengthen■branding, and broaden product sets via “go-to-market” models that personalize offeringsand advice, and create a whole newexperience

Invest in innovative investment processes that■take advantage of new data sets andanalytical techniques, and broaden investmentteams

Gain a greater understanding of cost drivers,■and break the traditional link between growthin AUM and costs

Implement advanced analytics across the■entire value chain (also outside the investmentprocess) to create significant upside throughhigher revenues and lower costs

Strengthen “execution muscle” to transform■the business model

Three clusters of European asset managershave pulled away from their competitors, andrealized significant growth through new businessand higher profitability. First are at-scale firmswith broad product lines, extensive marketing,global client relationships, and very low-coststructures. Between 2015 and 2017 these firmsearned profit margins of 55 percent on netrevenues. Second are customer-focusedmarketers. Through an intimate knowledge ofcustomers and superior delivery (be it viaintermediaries or increasingly digital or evendirect delivery), firms in this group earned profitmargins of 42 percent against net revenues.Third are the alpha generators, who seek togenerate superior portfolio returns throughinnovative investment processes, and earnedprofit margins of 35 percent on net revenues.The remainder of managers are “stuck in themiddle” strategically, and consigned to thebottom ranks of profitability, earning profitmargins on net revenues of just 21 basis pointson average.

In recent years, the gap in AUM growth andprofit margins between top-performingEuropean asset managers and the rest of theindustry has been growing. Firms therefore

Introduction

2 The state of the European asset management industry 2017

should tune their strategies towards one of thethree winning business models, although large,well-resourced managers can draw on elementsof all three.

Moreover, asset managers have a range ofoptions, and astute choices will ensure thatleaders maintain their competitive positions,while allowing innovators to move into the upperranks of growth and profitability.


2017: Another extraordinary yearfor Europe’s asset managers

The European asset management industryenjoyed a ninth consecutive year of records in2017, as AUM rose 8 percent to €22.5 trillion—one of the best showings since the financialcrisis. The global industry reached new highs aswell, powered by strong performance in many ofthe world’s stock markets (Exhibit 1).

Net new inflows from clients were among thestrongest of any major region, at €581 billion, or3 percent on the prior year, complemented by a5 percent gain from market performance. Even

though the effects of market performance wereweaker, Europe’s managers showed overall AUMgrowth in line with the average 8 percent pace ofthe last few years (Exhibit 2).

Typically, growth from net flows has been drivenby institutional investors (which make up 70percent of European industry AUM), but 2017saw inflows from the retail sector of 5 percent,versus just 2 percent from institutional clients.Across Europe, most country markets enjoyedstrong new cash flow: large contributions came

140

60

80

40

120

100

160

180

200

220

240

260

Nikkei 225

ASX200

S&P 500

FTSE 100

GDAX

CAC 40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Exhibit 1

Index price evolution Index = 100 (01/03/2007), 2007-18 year to date1

1 Indices used: US Equity: S&P 500; Germany: GDAX; Japan: Nikkei 225; UK: FTSE 100; Australia: ASX200; France: CAC 40.Source: ICI; Simfund; Datastream; McKinsey analysis

The surge in equity markets across the globe in 2017 powered growth in assets under management.


from the UK (adding 5 percent from retail and 4percent from institutions) and Germany (gaining 7percent from retail and 3 percent from institutions).

Peak levels of AUM carried through intoEuropean managers’ revenues and earnings,

which set records in 2017 (Exhibit 3). From 2007through 2017, average AUM increased by 62percent overall, while revenues climbed 56percent. Profit margins among Western Europeanmanagers rose to 13.0 basis points of averageAUM for the year, up from 12.1 basis points in

AUM growth%

Net ßow effect%

-19

14 8 9 14 7 147

1

2413 19

1120

2816 12

-76

-15

147 7 9 11 7 86

-1

-10

14 9 10 13 9 9

2008 2009 2010 2011 2012 2013 2014 2015 2017

WesternEurope

Emerging Asia

NorthAmerica

Japan/Australia

591

581

554

-102

2016

1

10 -3

0 0 -2 0 1 1 1 1 2

-2 3 2 2 0 2 5 4 3

811 -2 5 11 10 7 10 24

1 3 1 -2 -2 2 3 5 -2

0

3

14

7

Exhibit 2

AUM growth and net flows as a percent of beginning-of-year AUM1,22017 net flows€ billion

1 Includes 29 countries from North America, Western Europe, Developed and Emerging Asia (accounting for 98% of global AUM).

2 Numbers have been rounded off.Source: McKinsey Performance Lens Global Growth Cube

Net new flows for Europe’s asset managers were among the highest in the world in 2017.


Absolute proÞt pools€ billion

ProÞt pools growth, 2016-17%

Absolute revenue pools€ billion

100121

133 138 143158

100121 127 123 121

151

20162007 20152013 2014 2017

100119

131 140 150162

100 98 107123 123

147

20152007 2013 20172014 2016

100

140158

181204

227

100

141170

208 204

244

2017201520132007 2014 2016

100121 129 131 134

151

100115 125

137 140156

100

182205

235252

292

AverageAUM

Profitpools

Revenuepools

AsiaWestern Europe North America

~39~19

20%25%20%

~25

~69

Exhibit 3

Data indexed to 2007, includes only traditional AUM (excludes alternatives)1

1 Includes 29 countries from North America, Western Europe, Developed and Emerging Asia (accounting for 98% of global AUM).

Source: McKinsey Performance Lens Global Growth Cube

Western Europe’s asset managers set records for revenues and earnings.


2016. Measured against net revenues, profitmargins reached 37 percent (Exhibit 4).Profitability in most country markets was higheras well, and some surpassed their pre-crisis

high-water marks: In Germany, for example, profitmargins hit 18.3 basis points of AUM, versus16.9 basis points in 2007.

12.5 12.1 13.0

2013 2016 2017

35 36 37

35.9 34.0 34.6

20162013 2017

23.4 21.9 21.6

20162013 2017

Operating profit% of net revenues

Operating profit/AUMBps

Net revenues/AUMBps

Operating costs/AUMBps

Exhibit 4

Note: All metrics are for Western European asset managers.Source: McKinsey Performance Lens Global Asset Management Survey

Western European managers’ net revenue margins have edged lower since a recent high in 2013.


Profit margin trends are favorable,but are they durable?

Although profit margins rose in 2017, the yearwas not an unqualified success, and the resultspoint to several challenges that will put pressureon performance going forward. WesternEuropean managers’ net revenue margins haveedged lower since a recent high in 2013 through2015, and stand well below pre-crisis levels. Still,they remain well ahead of 2008 and the fewyears following.

While AUM have grown rapidly thanks to strongfinancial markets, increases in total costs areclearly outpacing the industry’s organic growthfrom net inflows. Expenses were up close to 5percent year over year in both 2017 and 2016, apace well ahead of those years’ net flowadditions of 3 percent (Exhibit 5). However, dueto the recent strength in asset growth, operatingcost margins, measured as a percentage ofAUM, have declined. Longer term, managers’

20152013 20162007 2014 2017

Investmentmanagement

Sales andmarketing

Operations

Technology

Management,administration,

and other2

Cost marginBasis points

Growth in cost 2016-17%

9.9

5.9

4.9

Net flows%

22.0

2

23.4

2

23.1

5

22.8

4

21.9

3

21.6

3

Western Europe cost pool by function1

Indexed to 2007

2131 33 35 37 35

1513 15 17 19 201716

1718 18 1922

2426

28 30 3124

4145

4849

54

100

153

125136

147

160

6.4

7.1

-4.2

Exhibit 5

1 Includes third-party business only.2 Includes management, administration, support, and other cost categories.Source: McKinsey Performance Lens Global Asset Management Survey

Western Europe cost pools grew by 5% in 2017, outpacing the rate of organic AUM growth.


total costs were up 60 percent from 2007 to2017. The corresponding total gains in AUM andrevenues came to 62 percent and 56 percentrespectively, but direct growth in terms of netnew assets from clients accounted for just 24percentage points.

Costs have risen in all categories for managers inWestern Europe, but the strongest increaseshave come in investment management, rising 10percent in 2017. Here, most investmentmanagement costs come in the form ofcompensation, which increased by 7 percentfrom 2016 to 2017.

Higher compensation is the result of managers’expansion of their investment teams in bothtraditional asset classes and alternative assets.The war for talent has forced salaries higher inthe aggregate, and per employee as well: Percapita investment management compensationrose approximately 40 percent from 2013 to2017.

Meanwhile, Western European managers’revenue margins have slipped over time,notwithstanding the sharp increases in AUM andrise of equity markets. Although revenue margins

improved in 2017, they dropped to 34.6 basispoints of AUM from 35.9 basis points in 2013,and 37.6 basis points in 2007. The forces behindthis revenue erosion are well-established:Institutional clients have demanded feeconcessions on active strategies, and in both theinstitutional as well as wholesale markets,customers are steadily migrating to low-feepassive strategies.

To sum up, the aggregate costs of Europeanasset managers have grown in line with thecombined gains in AUM. However, due to theexceptional market performance of the last tenyears, gains in net new assets accounted for asmaller share of the increase in total AUM. Giventhat much of the increase in costs has becomecrystallized into fixed outlays—especially thefixed component of compensation or theinvestments into IT and infrastructure—firms mayhave less control over profitability. Moreover, netrevenue margins have become thinner. Therefore,firms should be particularly concerned aboutthreats to profits from increased capital marketsvolatility, as well as a sustained market correctionthat could be triggered by increased geopoliticaland macroeconomic uncertainty.


Three dynamics will reshape assetmanagement

Based on recent success, managers may belulled into thinking that their current operatingmodels will support future growth. However, tosustain and build profitability, the industry willhave to address three interlinked forces:

The continuing shift in the asset mix away■from traditional active strategies to lower-cost/passive offerings or alternative assetclasses

Changing expectations of retail and■institutional clients, calling for a reengineering

of investment distribution and the investingexperience

The rise in data and advanced analytics,■redefining the entire investment managementvalue chain

Shift within asset mixThe movement away from traditional activestrategies (Exhibit 6) has already lowered averagefee rates, consolidated market shares, andshifted the balance of power and profitabilityamong asset managers.

Multi-asset/solutions

Passives Actives Alternatives

Commodities

Alternatives

MegaÞrms

Smart beta

Closetindexing

Highconviction

Hedge funds

Privateequity

Real state/Instructure

Liquidalternatives

Core in retail – distribution access with superior client solutions key

At risk – shift to other asset classes or continuation as sleeves of multi-asset

Scale game for a few large Þrms

Niche game of boutiques – mainly institutional given limited investment capacity

Growth limited by market capacity – Highly fragmented space

Exhibit 6

Firm size in segment competitive landscape

Market share direction

Source: McKinsey analysis

Change is on the horizon: Sustained shift towards passives, multi-assets, and alternatives.


This shift has been underway for more than tenyears in both the institutional and retail sectors,and since 2013 passive strategies have taken agreater share of European managers’ flows. Overthe coming five years, we expect that passive willgain a further significant share across retail andinstitutional markets, providing net flows of up to 6percent annually. Such a market move wouldnaturally benefit the few large firms who can thriveon very low fee rates.

This reallocation will not bring about the end ofactive management, however. In the retailsegment, investors will be increasingly drawn tomulti-asset strategies that combine equities, fixedincome, and other asset classes, providingsolutions designed to meet investors’ risk andreturn goals across a range of marketenvironments. Given the strong retail emphasis onthese product offerings, managers’ successdepends on building up an attractive multi-assetoffering quickly and moving beyond the traditionalbalanced products.

Active management will also see growth in theinstitutional sector, through the separation ofreturns into alpha and beta components. Investorswill continue to build passive core portfolios forcapturing beta exposures. These aresupplemented with satellite strategies forgenerating and isolating alpha, by combiningactive management with risk overlays that removebeta exposures. Alpha-beta separation offersmanagers two sources of growth: first, greaterAUM in high-conviction strategies seeking alpha inliquid traditional markets, and second, in illiquidalternative asset classes, as sponsors of pensionplans and sovereign wealth funds seek to meettheir obligations through the potential of theseclasses’ higher expected returns.

Changing client expectations and investing ex-perienceDigital delivery is about to change investors’everyday lives. Already today, 30 percent of

customers are using digital devices or channelsat some point in their investment product buyingjourney. Over 50 percent of investors indicatewillingness to invest through digital channels.Therefore, a compelling digital presence will bemandatory, not only for serving younger retailcustomers, but also affluent and high-net-worthindividuals.

Moreover, digital attackers and robo advisers areaggressively marketing to individual clients. Notfar behind are additional new competitors:Regulatory changes, such as PSD2, are erodingthe industry’s traditional barriers to entry,enabling skilled digital incumbents to capturemarket share without needing special licenses.

Firms need to innovate beyond distribution,however, and redesign the entire customerjourney. These innovations start with streamliningdigital onboarding, accelerating processes,eliminating paper and manual work, and reducingwaste by “getting it right the first time.” Ongoingservice will be improved by digital solutions forrecurring advisory, performance reporting, andclient coverage. Managers can also make theiroperations more effective through digitally-drivenRFP response management and sales support.

A stronger value chain through data and ad-vanced analyticsA few leaders have realized the value of data andanalytics and promoted them to the top of theirstrategic agendas, but many firms have so farimplemented only isolated pilot use cases. In ourview, data and advanced analytics will be essentialfor managers seeking to protect and expand theircustomer relationships, but these tools will also addsignificant benefits across the entire value chain.

In customer acquisition, we envision three primaryuse cases: improved sales coverage through moregranular segmentation; algorithms that predict clientpreferences (such as “next product to buy”); andmore precise management of marketing efforts.


Taken together, these marketing enhancementsthrough data and advanced analytics can deliverrevenue gains of 5 to 20 percent.

Portfolio management will also see multiple benefits.Alternative information sources, such as satellitedata and social media trends, can be developedinto novel leading indicators. Moreover, advancedanalytics will monitor portfolio managers’ decision-making for behavioral biases, and reducetransaction costs through improved tradingalgorithms. Through such innovative portfoliomanagement and risk controls, managers cangenerate an estimated additional 50 to 100 basispoints in investment returns.

Managers will also realize savings in operationsand overhead costs, through increased process

automation (such as matching andreconciliation of trades) and lower costs of datamanagement (from reliance on a single sourceof clean data). In some situations, overheadefficiencies from adopting data and advancedanalytics can save asset managers 10 to 30percent in operating costs.

To realize the full potential of advanced analytics,managers must come to understand theirchallenges and goals from a new angle, developa clear roadmap that ties data and analytics tofirm strategy, and then integrate them into theirbusiness processes. Also essential is aconcentrated recruiting effort for advancedanalytics specialists, particularly “translators”who are fluent in both business and analytics andcan integrate analytics into workflows.


A select group of firms has recognized theseemerging trends, and adapted their operatingmodels to find new opportunities, grow theirbusinesses, and sustain or expand profitmargins. In addition to these offensive measures,these firms are also defending their profitabilityby rationalizing their cost structures inanticipation of market downturns.

Given the industry headwinds, their performanceis remarkable: European asset managers in thetop profit-margin quartile earned 54 percent onnet revenues, versus 21 percent for the bottomquartile. This top-to-bottom profit differential hasexpanded considerably in recent years, and weexpect the gap to widen further.

Among the top quartile managers, which enjoynot only higher profits but stronger net inflows,three successful operating models emerge:

At-scale firms: These firms manufacture and■distribute a wide range of investmentproducts, and have been able to translate sizeinto scale. From 2015 to 2017, these broad-product firms gathered net flows of 5 percentannually, and realized an operating margin onnet revenues of 55 percent while keeping costmargins down.

Customer-focused marketers: The strength of■these firms lies in their insights on customers.They study their clients and target marketscarefully. They have built well-tuneddistribution engines, empowering andenabling distributing intermediaries andserving institutional clients effectively. Thesefirms generated annual client flows of 10percent between 2015 and 2017, and earnedmargins averaging 42 percent of netrevenues.

Innovative alpha generators: These firms seek■to deliver superior returns for their clientsthrough novel investment processes. Between2015 and 2017, innovative alpha generatorscaptured annual net client flows of 4 percent,and earned an average profit margin of 35 onnet revenues.

The remainder of the Western European marketappears to be “stuck in the middle” strategically,and lacking a clear and differentiating businessproposition. These firms gathered just 1 percentin client flows in 2015 through 2017, and earnedaverage profit margins of just 21 percent on netrevenues.

A shifting landscape createsopportunity


Tactical choices offer significantvalue

For many asset managers, a strategic andtactical realignment to a digital consumer andfinancial environment is essential for realizinggreater value. Fortunately, given the risingrevenues and profits of the past few years firmsare in a position of financial strength, and havemany tactical options for expanding their net newbusiness, improving portfolio performance, andenhancing profitability. Time is of the essence,however, as any sustained weakness in globalfinancial markets will drive cost marginssignificantly higher, deny managers the chance toprotect their market positions and profitability,and make large-scale investments much moredifficult.

In light of the dynamics shaping the Europeanasset management industry—the shift in assetmix, new client demands for digital delivery, thereshaping of the value chain through data andanalytics—we believe firms will need to focus onone of the three archetypes that have enabledselected firms to outperform. Larger firms withmore diverse operations and greater resourceswill be able to adapt all three across theirdifferent sub-businesses.

A choice of business model is not enough tosucceed, however. Asset management firmsshould also consider the following tacticalactions to benefit from industry dynamics:

Expand digital modes of delivery, strengthen■branding, and broaden product sets with “go-to-market” models that personalize offeringsand advice, and create a whole new experience

Invest in innovative investment processes that■take advantage of new data sets andanalytical techniques, and broadeninvestment teams

Gain a greater understanding of cost drivers■and break the traditional link between growthin AUM and costs

Implement advanced analytics across the■entire value chain (also outside the investmentprocess) to create significant upside throughhigher revenues and lower costs.

Strengthen “execution muscle” to transform■business models.

■ ■ ■

Adding to a string of successes since thefinancial crisis, Europe’s asset managers enjoyedan exceptional year in 2017, achieving records inAUM, revenues, and profits. To support thisgrowth, however, the industry’s cost base hasexpanded accordingly, and those higher costswill challenge profitability in the event of asustained drop in markets and revenues.

In addition to contending with cost structure,managers must confront three dynamics that areshaping the future of the industry. Each offersopportunities to adapt to new business modelarchetypes. In addition, leaders need to assesstheir unique strengths and resources to takeadvantage of the changing face of assetmanagement and apply a combination of tacticalmeasures.


For more information about this report, please contact:

Cristina Catania

Partner, [email protected]

Felix Germann

Associate Partner, [email protected]

Christian Zahn

Partner, [email protected]

The authors would like to acknowledge the significant contributions of the following colleagues to thisreport: Pooneh Baghai, Pierre-Ignace Bernard, Kevin Cho, Stefan Engelhorn, Nils Janssen, NiklasNolzen, and Verena Thaler. They would also like to acknowledge the leadership of Martin Huber andPhilipp Koch in developing the report.

Contact us

About the Research for this report

This report is based in part on insights gleaned from McKinsey’s Performance Lens data and analyticssolution for wealth and asset management. Performance Lens provides fact-based, actionableinsights to improve business performance by providing industry-leading benchmark data, analytics,and tools with McKinsey’s deep industry expertise.

Global Growth CubeThe Global Growth Cube is grounded in the understanding that asset growth, flows, and revenuetrends vary greatly across the major regions of the world, reflecting fundamental differences in marketmaturity, industry structure, and regulatory frameworks.

To provide deep insights on where to compete and to help asset managers make effective strategicgrowth, resource allocation, and product decisions, the Global Growth Cube dissects growth andrevenue trends in over 4,000 micro segments across 41 regions and countries, 9 client segments, 15asset classes, and 5 product vehicles.

Global Asset Management SurveyThe Global Asset Management Survey is the leading survey of its kind, with unrivaled coverage (over300 participants representing $40 trillion or 60 percent of AUM globally), data quality and depth(8,000 business performance benchmarks), and the longest track record in the industry.

Now in its 17th year, the survey helps asset managers assess their operational effectiveness versusrelevant peers and indicates actions to improve growth and profitability.

Sales AlphaMcKinsey’s Sales Alpha methodology measures the value add of sales and marketing (adjusting forinvestment performance), utilizing a factor analysis of over 10,000 retail and institutional products.

This tool conducts detailed fund-level analyses of gross sales, redemptions, and net flow metrics thatare aggregated at the channel and company level to help asset managers identify opportunities toimprove distribution effectiveness and stimulate faster growth.

Wealth Management SurveyThe Wealth Management Survey is one of the most widely published and respected surveys in theindustry. With more than 190 participants, it represents a significant share of the wealth business inWestern Europe and globally. It provides detailed overview on industry economics such as AUMvolumes, revenue and cost levels, as well as operational details on product and client splits.

Additional information regarding McKinsey’s proprietary knowledge on the asset management industryis available at www.mckinseyperformancelens.com, or by email at [email protected].

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