With operating margins at their lowest levels since the financial crisis, asset managers are being forced to “get creative,” according to consulting firm Cerulli Associates.
New research from the firm reveals that European asset management firms have responded to shrinking margins by introducing new fee models for active management, tying portfolio manager compensation more closely to performance, developing new products, and finding ways to cut costs.
“Asset managers’ operating margins have shrunk from highs of 40 percent to lows not seen since 2008,” Cerulli managing director André Schnurrenberger said in a statement. “Innovative thinking is now crucial to success.”
A Casey Quirk study of public asset managers globally concluded that average operating margins had fallen to 29 percent in 2018 — their lowest levels since the aftermath of the financial crisis. Driving these falling margins are pressures on managers to lower fees, as well as the migration of investors from active strategies to low-cost indexes.
Rising investor interest in private markets over public markets has also hurt traditional asset management firms, according to Cerulli. “It is those asset managers that have begun to adapt their models that will be best placed to survive the latest challenges,” the firm said in the report.
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Examples cited by Cerulli included Fidelity and AllianceBernstein, which are rolling out fee structures in Europe that include an index-cheap base fee and performance fees on excess returns over a benchmark. The research firm also highlighted Aperture Investors, the firm founded by ex-AllianceBernstein chief executive officer Peter Kraus last year. According to Cerulli, Aperture has “designed a novel compensation scheme for its portfolio managers involving deferrals and clawbacks that provides trustees with proof of manager alignment.”
Beyond implementing performance-based pay, Aperture has also cut back on marketing and distribution costs — services that Cerulli estimates to soak up between 20 percent and 30 percent of asset management revenues. Instead, the asset manager instructs its portfolio managers to build their own following and sales via social media.
Other cost-cutting trends noted by Cerulli include the rise of what the report dubs “passive plus” — the asset management equivalent of airlines adding the basic-economy ticket class. According to Cerulli, many passive managers are simply “doing less for their clients,” and requiring investors to pay extra for “passive-plus” services that offer them more oversight and control.
On the product development side, Cerulli said European asset managers are aiming to differentiate their line-up by focusing on more customized and “outcome-based” products, such as bespoke indexes or investment strategies tailored to specific regions. The report also highlighted attempts to innovate active management through the use of advanced technology like machine learning.
Looking forward, the research firm said it expected to see more mergers and acquisitions as mid-size asset managers “feel the pinch” of shrinking margins.
“To remain competitive, asset managers must continue adapting,” Schnurrenberger said.
