On the face of it, investment managers seem to be having a better time of it of late.
The group has recovered from the April decline, when according to the Bank of America survey, sentiment towards the global asset management industry was at a 30 year low. The recovery since then means many are posting good share price returns so far this year.
| Manager | Share Move YTD |
| M&G | +29% |
| Jupiter | +53% |
| Schroders | +24% |
| Blackrock | +8% |
Challenges remain however, and the landscape is likely to continue to change over the next 5 years. A recent report from McKinsey highlighted some of the key factors that will drive investment management here in Europe.
Business was better in 2024. In Europe, assets under management rose to €28 trillion – a record level. However profit levels are still 20% lower than the record set in 2021. This was due to a lower margin mix of business and continued rising costs. Operating costs for investment managers are up 10% over the past 3 years.
Basically there were positive net inflows into low margin passives and bonds and net outflows from higher margin active funds. The share of passives in Europe has grown consistently over the past 10 years from 11% in 2015 to 25% today. From €5 trillion in passives in Europe now, Morningstar expect the number to rise to more than €7 trillion in 3 years’ time. In the UK, the number of investors in ETFs surged over 50% in both 2023 and 2024.
This suggests more price pressure on active products. Average management fee on active products here in Europe was 42 basis points compared to 13 basis points for passives. There’s also pressure within the active universe as active ETFs gain share. McKinsey forecast 25% per annum growth in active ETFs in each of the next 5 years.
And if this wasn’t tough enough, European asset managers are also facing other challenges right on their doorstep.
European managers are losing market share to US-based players.
In 2007, there were 7 European managers were in the global top 20. Today there are only 4. And their market share has gone from 31% in 2007 to 11% in 2024.
European managers are capturing only about 40% of net inflows in Europe, while US managers are capturing almost 100% of their domestic flows. Partly this is due to many innovations in the industry (thematic investing, quantitative processes, alternatives etc.) being developed and scaled in the US, and partly due to the continued importance of scale.
So, if we fast-forward 5 years for our European asset managers, what does the landscape look like?
Margin pressure will likely remain both from the revenue line and the cost line.
Where is the pressure going to be greatest?
Probably in the “squeezed” middle.
If big European players can continue to build genuine scale, they can compete with the global giants. European asset management is still fragmented relative to the US. The top 10 European players account for 22% of total AUM in Europe. In the US, the corresponding figure is 74%.
At the other end of the spectrum, true alpha generators can also find a space where management fees can be justified and maintained.
For those in between, it will be difficult to capture flows and grow revenues all from a competitive cost base.
Expect industry consolidation in Europe to continue.
Over the next 5 years we should also expect to see increased spending on technology. Currently IT spending accounts for about 18% of total operating spending at European asset managers, and of this only about 20% of this is directed to application development or change. AI will play a pivotal role here.
The European asset management industry is in a period of structural change. Firms face sustained margin pressure and increased domestic and foreign competition. Long standing operational models are being eroded.
Expectations of the industry are changing, too. European policymakers are challenging asset managers to support strategic economic and social priorities, in a way maybe other policy makers are not.
European asset managers need to be crystal clear about their value proposition
Tradewinds 