EUROPE - Some of Europe's big name fund managers could find themselves on the market as the industry braces itself for dramatic profit slumps, according to a new report by strategy consultants Oliver, Wyman & Company and investment bank UBS Warburg.
The report - ‘The Future of Asset Management in Europe’ - paints a bleak future for Europe’s fund managers. Revenue growth is expected to be only 5% per year between 2001 to 2006 - rising from E122bn to E156bn - markedly lower than the near-15% rises during the 1990s boomtime. Pre-tax industry profits, which stood at E35bn in 2001, are expected to fall in 2002 to E31bn before recovering to E50bn in 2006. And assets under management are also expected to rise to E21.6trn by 2006 - or 7% - against the 20% rate of the bullish ‘90s. In the short-term the overall asset management is forecast to fall to E14trn by end 2002, against E15trn in 2001.
The report concludes that, without strict cost control and significant structural change, asset managers face a sustained period of poorer operating margins and profitability.
Scott McDonald, director at Oliver, Wyman & Company, said: The European asset management industry is delicately poised. The main strategy of the last decade - he who has the most assets wins - will no longer drive high valuations. Management will need to address a bloated cost structure in the face of slowing asset and revenue growth.”
Furthermore, pension reform and alternative investments are no longer expected to serve as industry “life savers”. Additional inflows generated by pension reform will only add E0.4trn by 2006; alternative investments such as private equity and hedge funds will add E8bn in revenues.
“While pension reform will have an affect, it is small and will not save the industry. Based on the ability to address the new challenges through innovative approaches to cost management and other structural changes to the industry, we expect a significant divergence in valuations between firms which can shift their focus to one of a series of more sustainable business models, and those that pursue the strategy of the last decade, added McDonald.
The report predicts further consolidation within the industry, since many fund managers lack the size to achieve significant costs cuts. At the moment the industry is fragmented with over 1,000 asset managers in Europe and no single player with a market share greater than 5%. An emphasis is also placed on distributing, as opposed to manufacturing investment products, and centralising non-core operations as the way forward in generating revenues.
Passive management is also set to benefit at the expense of “costly” active management. But low-scale generalist firms will lose out to bigger players. The growth of alternative assets is also poised to compliment the growth of passive management in an increasingly core-satellite world. In addition, there will be an increased demand for specialist managers focussing on products which guarantee protection against asset falls.
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