Despite an increase in managed assets, the asset management sector in Europe faced a significant decline in profits in 2023, as revealed by a study from McKinsey & Company. Are we witnessing the end of a cycle or the beginning of a new era?
Christian Zahn, a partner at McKinsey & Company in the Zurich office and co-head of the European Wealth & Asset Management Practice, cannot recall having ever seen such a development in the asset management sector at the European level: Profits declined for three consecutive quarters. It was not until the end of the year that the situation began to turn around. The increase in managed assets (AuM), with an increase of approximately 9 percent increase, was largely attributable to positive market performance in the fourth quarter of 2023.
Nonetheless, profits fell for the second time in a row, down 32 percent from the peak in 2021.
The shift towards passive investment funds remains pronounced. Contrary to usual market expectations, this may be due to increased market volatility, according to McKinsey and Company. Zahn poses the question: Are we seeing the end of a cycle or the beginning of a new era? The asset management specialist does not have a definitive answer. «We are observing different dynamics in the market: with no discernable clear trend. However, it is clear that opportunities are being seized through radical strategic decisions, which some market participants are already succeeding at,» he says.
The current study by McKinsey & Company offers the following insights:
1. Success comes to those who manage costs effectively
2023 was not a good year for the industry, but this does not apply to all participants. A significant profitability gap of 28 percentage points has emerged between top performers and the weakest market participants. In the past five years, some have managed to conduct good business and continue to grow, while others have not really developed. The key to success lies in cost management and focusing the business model on core growth areas. Only those who keep costs under control, actively invest in growth fields with clear value for customers, and structure their pricing accordingly will achieve profits and a higher scaling effect. Active pricing can compensate for weak investment performance in active bond funds, but not in equity funds.
«Many lack a more industrialized approach,» Zahn succinctly states. As a consequence, there is increasing pressure to consolidate.
2. Increase in non-managed assets
Even though business overall did not perform as well last year as in other years, the prospects are not fundamentally poor. There are still good opportunities to address non-managed assets, which rose to nearly 70 trillion euros in 2023. In particular, liquid assets amounting to EUR 22 trillion present significant medium-term potential: EUR 20 trillion of non-managed assets are in deposits and about EUR 2 trillion in low-margin managed money market funds. However, the potential can only be addressed through a clear value proposition, especially in terms of investment performance after costs. Moreover, strong distribution partnerships are crucial in convincing potential investors.
3. Great potential thanks to GenAI
Generative artificial intelligence (GenAI) allows for streamlining work processes and enhancing efficiency. McKinsey & Company estimates the economic potential in the asset management sector globally at 60 billion dollars.
4. Trend towards Net-Zero Investments
In the sustainability area, a trend away from ESG funds towards Zero-Net investments is becoming apparent. With a 20 percent share of AuM in ESG investment funds, the EMEA region still holds a leading position compared to other regions such as Asia or America. However, growth has been at 1 percent annually since 2021. In contrast, other product classes like Private Markets Impact or Decarbonization funds are performing better. «A shift is becoming increasingly apparent,» says Zahn.
