Asset managers hail a rising stock market, which grows their funds and the fees they collect. But that phenomenon alone has not improved their financial health. The profitability of many financial firms continues to deteriorate.
The S&P 500 is up 85 percent over the past five years but even as the index continued to approach new highs, the operating profit margins of asset managers have steadily thinned. The median industry operating margin was 42 percent in 2021, 36 percent in 2022 and 32 percent in 2023, according to a benchmarking survey by Casey Quirk and McLagan Performance Intelligence.
Rising markets paired with worse-off asset managers might not seem intuitive but it can be explained. “Capital markets have been a little volatile but for the most part they’ve rebounded. So that’s helped a lot. It’s masked some of the pain that exists underneath,” Amanda Nelson, a principal with asset management consultant Casey Quirk, a business of Deloitte, told Institutional Investor.
Over the past two years, interest rates have remained higher and investors have sought safe places for capital that still generate some returns. “So many investors are keeping cash on the sidelines and in money market funds. So it’s been a pretty muted overall growth environment,” Nelson said.
In addition to feeble inflows and weaker company brands, the cost of doing business as an asset manager continues to meaningfully rise. Operating expenses grew at a rate between 2020 to 2023 that has cut into profits. The growth rate for data and technology was 13 percent over those three years; operations was 9 percent; business and support functions was 6 percent; investment management was 5 percent; and sales and marketing was 4 percent.
The business function with the fastest growing costs — data and technology — is effectively unavoidable. Every asset manager is investing in its data and technology to make it more efficient, generate more alpha, and meet the demands of investors that want everything better, faster and cheaper.
With an industry median operating margin at 32 percent, most asset management companies are far from peril. But some are nonetheless coming to Casey Quirk a little worried. The rising-cost trend has been going on for years and there’s no end in sight.
“Those pressures combined are just creating, I think a lot of pressure, but also a lot of concern for managers as they think about: What’s going to happen to us over the next five [or] 10 years? Nelson said.
Markets tend to go up over time, but they won’t save asset managers. Firms must keep growing, Nelson said. To do that, managers are turning to new asset classes and products. As mutual funds decline in popularity, Nelson said asset managers are most often considering new vehicles for their strategies, such as active ETFs, or getting into private markets — things that require their own distinct company infrastructure, expert personnel, and investment.
“You see a lot of traditional firms trying to buy their way in, lift out teams, build out new capabilities,” Nelson said.
The alternative asset managers are a mixed bag. Many mid-size firms have done one thing really well and been successful and are wondering where meaningful growth will come from going forward. For example, private equity firms are considering getting into private credit.
“I don’t think it’s a one-size-fits-all story of all alts managers are doing great, all traditional are doing poorly. I think there’s winners in both categories and then there are firms that are more challenged in both categories as well,” Nelson said.
Nelson recently went to an industry conference and said that when attendees were polled about their strategic priorities, she was surprised that — in a room full of traditional asset managers — offering alternative investments to retail investors was the top choice. “A lot of the firms that were in the room don’t have alternatives today. So, to me, that means everyone’s trying to get that capability even if they don’t have it. They may have the retail presence, but they don’t necessarily have the right investment capability,” Nelson said.
“Private credit, private equity infrastructure, real estate, [those] will continue to be a big growth driver in our industry. I don’t have any doubt about that. Where my doubt comes in is: Does that mean every manager should try to pursue that? To me, the answer is probably no, because I don’t think everyone is going to be well positioned to actually succeed in that space.”
