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The Hunt for Elusive Growth:

Asset Management in 2012


Will the goose keep laying golden eggs?
June 2012 McKinseys annual perspective
on the global asset management industry

Executive Summary
In the face of a highly volatile and uncertain macroeconomic environment, the global asset
management industry's recovery from the financial crisis stalled in 2011. While asset management
remains the most attractive financial services sector, with a return on equity of 13.5% at the end
of 2011 (compared to 8.1% for insurance and 5.1% for banking), the picture looks less positive
when viewed over a longer time period. Since 2007, global assets under management (AuM) have
been growing at a slower pace than total financial assets, the industry has struggled to attract net
inflows, and profits have declined by a third.
At the same time, growth expectations for the industry remain high 30% of the market value
of asset managers is based on expected future profit growth. Restoring profit growth is the
most pressing priority for the industry. To meet the challenge, asset managers must both ensure
that their supporting cost infrastructure is flexible and adaptable to a fast-changing market
environment, and drive top-line growth with granular decisions about where to play and most
important invest appropriately behind those convictions.
To complicate matters, new McKinsey research reveals that growth in asset management is highly
concentrated by area and by player, making strategic decisions on where to invest more difficult
and important than ever. To help asset managers pinpoint opportunities, McKinsey has developed
a proprietary model that dissects growth and profitability trends by regions and countries, client
segments and asset classes. Results from this model and from McKinseys benchmarking survey
of over 300 asset managers covering approximately 60% of global AuM reveal the following:
S
 tructural shifts are impacting growth and profitability. From a high level, the asset
management industry appears to be in the midst of cyclical change. However, comparisons to
the previous market recovery suggest that deeper, structural shifts are at work. First, growth
since the financial crisis has come almost exclusively from market appreciation, as opposed to
net flows, making the industry more vulnerable to volatility. Second, asset managers are losing
share of rising global financial assets. Finally, profitability in developed markets remains well
below pre-crisis highs, buffeted by lower revenues and higher costs.
L
 ow flows overall, but granular opportunities exist by geography, segment and asset class.
While adverse conditions and crises have exerted a gravitational pull on all asset management
markets, emerging market regions have shown more resilience and continue to grow faster
than developed markets (especially in Latin America). Yet, even though divergence has
increased between countries, growth has also been concentrated by client segment and
by asset class. Over the past four years, the retail segment has declined globally and the
institutional segment has remained flat. The individual pension plan/defined contribution
segment has been the most consistent source of growth worldwide, in some cases the only
source, as in North America. Specialized asset classes including alternatives have accounted
for the majority of growth in asset classes.

 C
 ompetition is fierce, with a wide open playing field. Despite granular opportunities, flows
have been minimal overall, and highly concentrated among a handful of players, particularly
in retail. Asset managers are competing against a broad spectrum of wealth managers,
including private and investment banks, insurance companies and independent financial
advisors (IFAs), all of whom offer similar services. The reality is that asset management exists
as part of the larger wealth management market. In addition, many of these competing
players have direct access to customers through proprietary distribution channels, while
asset managers primarily rely on business-to-business or business-to-consumer distribution.
Asset managers will need to rethink their distribution model and product/service offering in
light of these challenges.
S
 even global trends will shape growth over the next few years. Growth in asset
management will continue to evolve in diverse and complex ways, but seven larger trends
will strongly influence that growth. They include a continuing concentration of growth in
emerging markets that will force asset managers to strategically focus their global footprint;
a mainstreaming of alternative investing, which will account for a significant portion of
growth across the globe; and the growth of objective-oriented solutions, which is shifting
the industrys focus from generating alpha relative to specific benchmarks to delivering
outcomes that clients need.
The asset management industry continues to be highly attractive compared to other financial
services sectors. However, in an era of elusive growth and dampened profitability, strategic
decisions concerning where and how to compete have never been more important. Overall, the
environment will be tougher, with fewer players enjoying the growth rates and profitability of the
pre-crisis era. Some players are likely to disappear altogether. Winning firms will be those that
understand the granularity of growth in asset management and make the changes necessary to
meet the challenge.

I. A stalled global recovery, with


diverse undercurrents of growth
In 2011, post-crisis recovery in the global asset management industry stalled in the face of
macroeconomic shocks.
W
 hile global financial assets have grown by 10% since 2007, asset managers share of those
assets has declined.
Fundamental structural changes are altering patterns of growth and profitability across the globe.
G
 rowth currents in asset management are highly concentrated in specific regions, client
segments and asset classes.
Recovery in the global asset management industry stalled late in 2011 amidst considerable global
macroeconomic headwinds. While the industry remains the most attractive financial services
sector, with healthy returns and expected profit growth far in excess of banking and insurance
(Exhibit 1), the latest turbulence has dampened global growth and profitability over the short
term, and exposed the weakness of the recovery. Asset managers have lost share of rising global
financial assets over the past four years, organic growth in terms of net new inflows has been
anemic, and profit levels remain well below pre-crisis highs. For asset managers, then, profitable
growth remains the greatest priority and the most significant challenge.
The word global in this context is, of course, a rough shorthand. There is no single worldwide
asset management market, but a collection of many markets and client segments, with
fundamental differences in market maturity, industry structure and regulatory frameworks. New
McKinsey research into asset management growth and profitability confirms global averages are
masking diverse undercurrents among regions and countries, client segments and asset classes.
Exhibit 1: Asset management remains the most
attractive industry in the financial sector

Healthy returns (ROAE)1


2011

Robust expected profit growth


Implicit growth over the next 3-5 years
13.5%

8.1%
5.1%

3%

-3%

Banking

Insurance Asset
management

1 Return on Average Equity


SOURCE: Bloomberg; Datastream

-10%
Banking

Insurance Asset
management

Stalled recovery reveals structural shifts


After two years of growth following the financial crisis, recovery in the global asset management
industry stalled in 2011, even as total global financial assets continued to grow. At mid-year, the
outlook seemed rosy, with AUM reaching record high levels. Then, macroeconomic shocks led to
sharp stock market declines and outflows in the third quarter, especially in Europe, leaving global
end-of-year AUM back at beginning-of-year levels 38 trillion.
The external shocks have dampened growth and profitability, but also exposed the weakness
of the recovery particularly given that one-third of asset managers market value is predicated
on the assumption of growth. At a high level, the industry progression since the financial crisis
resembles that of the last market cycle, with cost income ratios and operating profits recovering in
a similar fashion over the two time periods (except in Europe, where profitability tumbled in 2011).
The similarity of these trends argue for the notion that we are in the midst of a cyclical trend.
However, three characteristics of the more recent recovery suggest that deeper structural changes
are at work:
 G
 rowth from market appreciation, not flows: Globally, asset growth since the financial crisis
has come almost exclusively from market performance (Exhibit 2). Despite higher saving rates
across much of the developed world, global net inflows have accounted for only 0.6% of total
AuM growth since the end of 2008. This is a stark contrast to the first three years of the market
recovery cycle that began in 2002, when net flows ranged from 3% to 5%.

Exhibit 2: Market performance has accounted for almost all asset


growth since the crisis
Market performance
Net flows
Net flows as % of
beginning-of-year AuM

Global assets under management


EUR trillions, year-end
38.1

-0.3
0.3

38.2

2011

2.5
0.2

-7.4
4.3

0.3
2007

0.1

2008

2009

2010

2011

0.9%

0.2%

0.6%

0.7%

SOURCE: McKinsey Global Asset Management Database

D
 ecreased share of wallet and loss of investor trust: Even with multiple rounds of market
turbulence and deleveraging across the developed world, global financial assets have grown
by 10% overall since the end of 2007. However, asset managers did not gain much from this
growth. Overall, AuM as a share of total financial assets globally fell from 25% at the end of
2007 to 22% in 2011 (Exhibit 3).
Exhibit 3: Asset managers share of total global assets has declined

Total global financial assets 2007-2011


EUR trillions, year-end

CAGR
2007-11
163

169

120

125

131

3.2%

31

35

38

38

0.1%

2008

2009

2010

2011

154

150

155

Internally or
unmanaged
assets

116

119

Managed by
asset managers

38
2007

Asset manager
share of total
financial assets

25%

2.5%

22%

SOURCE: McKinsey Global Asset Management Database

P
 rofitability not keeping pace: Despite near record high asset levels, global asset
management profit pools in 2011 remained roughly 20% to 30% lower than 2007 pre-crisis
highs in North America and Western Europe (Exhibit 4). Compared to the start of the last
market cycle, average profit margins (profits as a bp of average AuM) have been significantly
lower in the two regions over the last three years. This is a result of reduced revenue yields in
Europe (due to adverse changes in product and client mix) and higher costs in both regions (in
relative and absolute terms).

Exhibit 4: North American and European asset management


profit pools remain well below 2007 peak levels

2007 results indexed to 100


Revenue pool

North America

Profit Pool

100 96 86

Western Europe

Average AuM

100 93 90 100 103

100

2007 08 09 10 2011

2007 08 09 10 2011

94 97

100 90
55

60 52

76

76

81

100 90

100
66

78

Cost pool

90 96

81 76 90

88

2007 08 09 10 2011

100 96 90 101 108

100 96 94 101 106

2007 08 09 10 2011

SOURCE: McKinsey Global Asset Management Database

Diverse undercurrents
So much for the global view. Digging deeper, we find that asset growth and profitability varies
greatly across the major regions of the world, reflecting fundamental differences in market maturity,
industry structure and regulatory frameworks. To provide insights at the geographic/regional,
client segment and asset class/product level, McKinsey has developed a global growth model
that analyses asset growth, flows, revenues and profitability along each of these dimensions (see
appendix on page 26 for information on McKinseys Global Asset Management Growth Cube Model).

Geographic decoupling
Over the past four years, emerging markets have decoupled from developed market regions,
generating strong growth, healthy net inflows and profitability. This performance is based on
stronger economic fundamentals and comes despite recent concerns about rising inflation and
slowing growth rates, particularly in Emerging Asia. Among the emerging market regions, Latin
America experienced the fastest AuM growth: a cumulative 58% since 2007. Even the slowest
growing of the emerging markets Emerging Asia grew at 17%, with net inflows of 18%. In
contrast, AuM barely budged over the past four years in the two largest developed markets, North
America and Western Europe (which jointly account for 77% of global AuM) and cumulative net
flows have been weak (1%). Japan endured a bruising 15% decline in AuM over the same time
period thanks to poor market performance, but flows were surprisingly strong (Exhibit 5).

Exhibit 5: Emerging markets have grown faster than developed markets since
2007 due to stronger market performance and inflows
Cumulative net
flows 2008-11
as % of YE 2007
AuM

AuM growth
Year-end
2007-2011, %

Developed

North America

-2%

2%

Japan

58%

Emerging Asia

17%

CEE & Russia

20%
0%

7%

n/a

27%

Latin America

-19%

6%

13%

Africa & Middle East


Emerging

1%

4%

-15%

Australia

Global

-4%

0%

1%

Western Europe

Market
performance

n/a
37%

21%
18%
23%
2%

0%
-3%
-2%

SOURCE: McKinsey Global Asset Management Database

While the relative strength of emerging markets compared to developed markets persisted in
2011, most of these regions were impacted by high market volatility. While LatAm continued to be
a bright spot in 2011, with AuM growing by 15% (net flows of 4%), Emerging Asia AuM increased
by only 1% (with net inflows of 3%). This dampening of growth in Emerging Asia underscores the
need for scalable business models in emerging markets.
Growth in 2011 was even more challenging for developed markets. AuM in North America
remained flat (but with positive flows for the first time since 2008). AuM fell 2% in Western Europe
and 6% in Japan; healthy growth in the superannuation business led to a 5% AuM increase in
Australia (Exhibit 6).

Exhibit 6: In 2011, emerging market growth slowed, but still


outpaced developed market growth

AuM growth
2010-2011, %
0%

Developed

North America
Western Europe
Japan

-2%
-6%

11%

Emerging

Africa & Middle East

15%

Latin America

Market
performance

1%

0%

0%

-2%

1%
5%

Australia

Cumulative
net flows 2011
as % of YE
2010 AuM

-6%

2%

3%

n/a

n/a

4%

10%

Emerging Asia

1%

3%

-2%

CEE & Russia

3%

4%

-1%

1%

-1%

Global

0%

SOURCE: McKinsey Global Asset Management Database

Asset management profitability across the worlds regions has generally followed the same trend
lines seen in growth and flows. Profit margins (in bps of average AuM) remained comparatively
strong in Emerging Markets (at about 30 bps), but developed markets were more mixed. In 2011,
margins remained unchanged in North America, at 9 bps, as both revenue margins and costs
over assets increased by a basis point. Profits declined by 2 bps in Europe (to just under 11 bps)
as revenue margins fell and costs increased.

Concentrated segment and asset class growth


The picture for segment and asset class growth is similarly concentrated. After having grown
ever so slightly from the end of 2007 to 2010 (0.6%), institutional AuM levels, excluding the DC
pension segment, froze globally in 2011. In North America, institutional assets have declined 1%
annually since 2007 (0.4% decline in 2011), driven by a continuing contraction of the defined
benefit pension fund segment. In contrast, in Western Europe, the institutional segment has
grown 0.5% annually since 2007, but contracted by 2% in 2011 (with exceptions; e.g., Germany
showed strong growth). Among the other major institutional markets, AuM have grown more
than 2% since 2007.

10

In contrast, the individual pension plan/DC segment has been the industrys growth engine
across the globe gaining over 3% annually since 2007 (4% in 2011). By region, annual growth
was slowest in North America (1%), and a rapid 7% in Western Europe and 8% in all other
markets (Exhibit 7).
Exhibit 7: Defined contribution is the fastest-growing segment
globally, followed by institutional
North America
Western Europe
Other regions

AuM, EUR trillions


Retail

Institutional excluding DC

-1.6% p.a.
14.8

9.0

CAGR, %
2007-11

13.9

8.8

0.4% p.a.

3.2

2.8

-3.5%

2.6

2.4

-2.2%

2007

2011

CAGR, %
2007-11

18.0

18.3

6.7

6.4

-1.0%

6.3

6.4

0.5%

-0.7%

5.1

5.5

2007

2011

Defined contribution

2.1%

CAGR, %
2007-11

3.3% p.a.
6.0
5.3
3.4
1.4

0.5
2007

3.5
1.8
0.7
2011

1.0%
6.9%
7.6%

SOURCE: McKinsey Global Asset Management Database

The retail segment, still a major source of assets and profits globally, has shrunk by roughly 2%
annually since 2007. The decline is most apparent in developed markets. Retail AuM in Western
Europe contracted by more than 3% annually (net annual outflows of ~2%), led by declines in
Southern European markets, as major distributors shifted clients away from retail mutual funds
into deposit products. In North America, retail AuM have declined by ~1% annually since 2007.
However, net flows were positive (1% per year), fueled by gains in the independent channel as well
as in specialized asset classes.
The retail segment outside of North America and Europe also contracted by over 2% annually
since 2007 (despite overall positive flows of 2% annually), but again with notable differences
among regions: CEE and Russia saw cumulative outflows of 11% versus strong cumulative net
inflows in LatAm, Emerging Asia and Japan of 8%, 7% and 14%, respectively.

11

From an asset class perspective, global net flows have been highly concentrated in specialized
classes, such as fixed income, emerging market equity, balanced/multi-asset class and
alternatives. On the retail side, for example, flows have clearly shifted away from money market
in all regions except Emerging Asia, towards fixed income (particularly in North America and
Emerging Asia), equity (in LatAm and Asia), balanced/multi-asset class (in North America and
Western Europe) and finally, to alternatives virtually everywhere (Exhibit 8).
Exhibit 8: The global asset class landscape
Cumulative retail segment net flows 2008-2011, % of 2007 AuM
Equity

Fixed
income

Balanced

Money
market

>5%

Alternatives
& other

0-5%

Total

North
America

3%

Western
Europe

- 6%

Japan

14%

Australia

0%

Emerging
Asia

7%

Latin
America

8%

CEE &
Russia
Total

- 11%
1%

15%

SOURCE: McKinsey Global Asset Management Database

6%

-21%

16%

2%

<0%

n/a

12

13

II. The global search for growth


opportunities
In North America, flows have been highly concentrated in defined contribution and in a few
specialized asset classes and in a handful of firms.
T
 he European asset management landscape has been defined by collapsing retail flows,
sharp difference between individual markets, and a winner takes all environment.
G
 rowth across emerging Asia disappointed in 2011, but as in Europe, there were sweet spots
by product and by country.
In Latin America, strong growth continued in Brazil, Mexico and Chile, and overall the
investment mix is gradually becoming more sophisticated.
Asset management growth opportunities clearly exist across the globe, even in the most
challenging markets. But decisions regarding where to play which accounted for the majority
of total growth over the last decade are more complex than ever. The few firms with sustained
above average growth rates go deeper in identifying opportunities than their peers. They look
first to growing markets in their specific geographies, select the most attractive client segments
within those regions, and then design the product or solution to meet the needs of those clients.
In this chapter we describe the granular growth and profitability trends uncovered by our most
recent research.

North America
Recovery in the North American asset management industry hit a rough patch in 2011 in the
form of volatile markets and structural headwinds. The year began well, with market appreciation
pushing AuM to record heights by mid-year. But by year end, AuM were back to 2010 levels.
Moreover, despite an increase, since 2007, in the savings rate (to 11%) and positive GDP growth
(2%) net inflows have been anemic at less than 1% (3% in 2008, -2% in 2009, -1% in 2010 and
1% in 2011).
Industry pretax operating margins did inch up to 28% of revenues in 2011 from 27% in 2010
(while profits over AuM remained unchanged at 9 bps). However, profitability remains roughly
20% below pre-crisis levels as revenues and costs face continuing pressure. Specifically, while
2011 overall net revenue yields edged up by 1 bp in both retail and institutional, prices are on
average 6% below 2007 levels in retail and about 10% lower in institutional. Costs, meanwhile,
continued to grow, increasing by 7% in absolute terms in 2011 (1 bp of assets), with the fastest
increases in sales and marketing and operations.
Notwithstanding the problems associated with managing assets in a highly volatile market
environment, flows remain highly concentrated in North America. Since 2007, net new money
has flowed almost exclusively to the DC segment and to a lesser extent to the retail segment.
Flows have also been highly concentrated in specialized asset classes ETFs, taxable fixed
income, multi-sector/global/emerging market fixed income, alternatives, and multi-asset solution
products (Exhibit 9).

14

Exhibit 9: In North America, flows have been concentrated by segment and by asset
class, with growth fastest in DC and in ETFs and multi-asset class solutions
Annual net flows 2008-2011

Cumulative net flows1, North America, 2008-2011


EUR Billions

ETFs

0-5%

n/a

<0%

Fixed income/Money market

Equities

Domestic

>5%

Intl/
global

Multisector/
U.S.
global/ Money
U.S.
market
taxable tax-free EM

Alternative2

Multiasset
class3

Total

Retail
(ex-DC)

35

Institutional
(ex-DC)

-78
138

DC
Total

306

-1238

77

700

19

105

1 Net flows for institutional ex-DC are estimated based on limited data
2 Alternatives for retail refer to mutual funds and ETFs with strategies that mimic various hedge fund, PE, commodities, and re
3 Includes target date/risk products

-281

130

267

94

al estate investments; excludes ETFs

SOURCE: Cerulli, Strategic Insight, ICI, EBRI, Federal Reserve Flow of Funds, LIMRA, Benefits Canada, P&I, NACUBO, The
Foundation Center, Insurance Asset Manager, eVestment Alliance, McKinsey estimates

By client segment, net inflows in the retail market since 2007 have been concentrated in the
harder to serve independent channel (i.e., independent financial advisors, independent broker
dealers, registered investment advisors).
The beneficiaries of growth in North America are a select group. Of the hundreds of firms
targeting the five fastest-growing asset classes in the U.S. fund sector (which have cumulatively
garnered 168% of all net fund flows since 2007, as all other asset classes have had negative
flows), ten have captured 74% of flows. These firms are among the nations largest, having
capitalized on their scale and a diverse set of market-leading specialized asset class capabilities,
and are now positioned to succeed in an environment that is shifting towards multi-asset based
investment solutions. (Later this summer, McKinsey will release a report on the North American
asset management industry that details the trends discussed above.)

Europe
The debt crisis and the ongoing effects of regulatory reforms have hit the European asset
management industry hard. In 2011, AuM decreased 2% to 10.9 trillion and profitability fell to
~11 bps (from ~13 bps in 2010), due to lower revenues and higher costs.
These averages, however, do not capture the extremes within Europes markets. Between 2007
and 2011, the UK and Scandinavia were the only European markets to experience AuM growth in
both retail and institutional. Switzerland attracted net inflows in both segments, but faced negative
market performance. Germany and Benelux offset declines in retail with gains in institutional
AuM. France, Spain, Portugal and Italy suffered from a weak retail segment, with the latter three

15

Exhibit 10: European AuM growth has been negative since 2007, but
with high variability by country
European AuM growth and net flows by country
AuM growth
2007-11, %

Germany

4%

Benelux

4%

Western Europe1

0%
17%

-11%

9%
-5%
4%

-8%

Switzerland

4%

-3%

-17%

-3%

France

Iberia

9%

10%

Scandinavia

Cumulative net
flows institutional2
2008-11, %
of 2007 AuM

25%

19%

UK

Italy

Cumulative net
flows retail
2008-11, %
of 2007 AuM

-20%

-16%

-34%

-31%
1%

5%
-5%
-13%

-6%

3%

1 Includes other countries not shown above


2 Including DC
SOURCE: McKinsey Global Asset Management Database

experiencing dramatic decreases in their overall AuM base (Exhibit 10).


These trends persisted in 2011. The UK market grew a modest 1% and profit margins held
steady (from 13.7 to 13.2 bps) thanks to stable revenues and costs. In Scandinavia, AuM
declined by 3%, driven by negative market performance and assets increasingly being
managed internally by the Norwegian sovereign fund. Institutional inflows continued to prop
up the German and Benelux markets, while France, Italy and Iberia deteriorated further. Italy,
Spain and Portugal in particular faced a perfect storm of headwinds sovereign debt crisis,
macroeconomic woes, and the weakness of proprietary banking/insurance parent companies
which led to a shift from asset management products to deposit products, and further dramatic
declines in AuM (8% in Italy, 6% in Iberia) (Exhibit 11) and profitability.
Europes retail segment has suffered since the crisis despite higher savings rates. In Western
Europe, retail AuM have contracted in total by 13% since 2007. The decline intensified in
2011, with overall net outflows of 3%, driven by net outflows in every country except the UK,
Scandinavia and Switzerland. Retail profit pools have contracted even more sharply, as margins
have declined faster than AuM.
On the retail distribution front, the share of retail AuM distributed through third-party channels
rose to approximately 34% in 2011. However, only a limited number of players have converted
this access into substantial net inflows, leading to an unparalleled concentration, with topquartile players capturing around 60% of recent net inflows across Europe compared to roughly

16

Exhibit 11: European AuM growth in 2011 was also negative,


with continued variability
European AuM growth and net flows by country
AuM growth
2010-11, %
Benelux

2%

UK

1%

Switzerland

1%

Germany

-3%

Scandinavia

-3%

France

-4%

Iberia

-6%

Italy

-8%
1

Western Europe

-2%

Net flows
retail
% of 2010 AuM

Net flows
institutional2
% of 2010 AuM

-5%

7%
5%

1%

1%

1%

-2%

4%
1%

-6%
-8%
-11%
-3%

-2%
-2%
-2%
3%
1%

1 Includes other countries not shown above


2 Including DC
SOURCE: McKinsey Global Asset Management Database

20% in 2005.
Growth in Europes traditionally more resilient institutional segment (including DC) was broadly flat
in 2011. An exception, Benelux benefited from contributions from Dutch pension funds, gaining
7% in net inflows. Germany also experienced net inflows of 4% driven by insurance and pension
fund growth. The upside for the institutional segment is that opportunities exist to increase the
current share of 13% in institutional financial assets portfolios, through liability-driven investment
strategies and outcome-oriented solutions and services such as risk management.
In response to these trends, the asset management industry in Europe is growing even more
specialized and competitive, with investors and intermediaries taking a more segmented view
of the asset management universe, selecting players based on their particular asset class,
investment style, solutions on offer, geographic focus and institutional background. (For more
on how four distinct groups of firms will populate the European marketplace in the future, see

Check or checkmate: Game-changing strategies for the asset management industry,


McKinsey & Company.)

17

Asia
Despite strong growth across the region since 2007, the mood in Asias asset management
markets is less than exuberant. The Asian asset management story is predicated on growth,
but the industry has failed to keep pace with broader economic growth for example, in the
growth engine of Emerging Asia, the share of total personal financial assets managed by
asset managers has fallen from approximately 15% in 2007 to 10% in 2011.
Growth was particularly disappointing in Emerging Asia in 2011. Although assets grew in
total by 17% from 2007 to 2011 (Exhibit 12), growth was only 1% in 2011, with a 2% market
decline offsetting net inflows of 3%. Profitability is also suffering. Margins for 2011 are likely to
drop by a basis point or more, driven by pressures on both revenues and costs.
Exhibit 12: Emerging markets have grown faster than mature markets since 2007
Emerging markets AuM growth and net flows by country, 20072011

China

7%

Korea

Emerging
Asia

LatAm

Market
appreciation

Net flows

AuM growth

12%
47%

23%
90%

Malaysia

-5%
24%
71%

19%

India

13%

15%

-2%

Emerging Asia total1

17%

18%

-1%

Brazil

60%

Mexico

57%

Chile

38%

Argentina

37%

LatAm total

58%

18%
35%
28%
13%
21%

41%
22%
11%
24%
37%

1 Includes countries not shown above


SOURCE: McKinsey Global Asset Management Database

Growth was also highly variable across Asias markets, with assets increasing in China (4%),
Korea (5%) and Malaysia (16%), but falling in India (2%) despite positive inflows (Exhibit 13).

18

Behind this lackluster growth was a challenging retail segment. Overall, emerging Asia
experienced slight outflows from retail in 2011 (-0.4%) and mixed market performance. In China,
poor stock markets led retail investors to shift investments from equity funds into short-term
deposits, insurance products and real estate. Korea experienced particularly severe outflows due
to a removal of tax benefits for overseas equity investment as well as continued migration
to deposit to take advantage of principal protection offered by government deposit insurance.
By way of contrast, retail AUM in Japan declined by 7%, but net flows were 3% due to the
growing popularity of double decker funds (products combining high yield fixed income with
currency overlay).
Exhibit 13: Emerging markets continued to show relative strength in 2011
Emerging markets AuM growth and net flows by country, 20102011

Emerging
Asia

China

4%

Korea

3%

India

5%
4%

3%

Chile

LatAm total

12%

-1%

2%

3%
16%

42%
14%

10%

2%

14%

Argentina

-2%

5%

60%

7%
-6%

3%

1%

Brazil
Mexico

-2%

12%

-2%

Emerging Asia total1

LatAm

-2%

19%

Malaysia

Market
appreciation

Net flows

AuM growth

4%

26%
10%

1 Includes countries not shown above


SOURCE: McKinsey Global Asset Management Database

Emerging Asias institutional (and DC) segment enjoyed strong growth of 7% in 2011 (net flows
of 5%) with strong growth across most markets fueled by sovereign funds, insurers and pension
funds. In the larger Emerging Asian markets, like India and China, net inflows were further
impacted by local factors for example, by a push in China to increase pension benefits and
coverage of the elderly and by surplus cash in corporate treasuries in India.
By asset class, net flows in Asia were highly concentrated into fixed income and money market.
Flows into alternatives also increased 20% between 2010 and 2011, to 26 billion, and were
more diverse, shifting slightly away from real estate to capital guaranteed products and other
types of alternative investments. Index funds also saw a 10% increase in flows to 20 billion, and
solutions-based products are reportedly on the rise (particularly those with an income flavor).

19

In addition to the challenge posed by highly variable growth across markets, Asia remains highly
fragmented geographically and in terms of consumer preferences, regulations and distribution
structures. To succeed, asset managers must build scalable and economically viable business
models in a region that is already hard to serve profitably and getting more so.

Latin America
Latin America accounts only for roughly 3 percent (1 trillion) of global AuM, but has been one
of the fastest-growing and highest-margin regions. Growth will likely remain strong due to solid
economic prospects, increasing foreign investments and market under-penetration. Brazil, Mexico
and Chile should remain the most robust markets due to their starting position and country
stability. However, as investor sophistication increases, interest rates decline and increased
transparency brings pressure to bear on fees, profitability is likely to fall.
In addition, LatAm markets are capacity-constrained in the sense that liquidity is still lacking, even
for large players, and the private credit market is incipient across Mexico, Chile and Brazil (17%
of GDP, 18% and 23% respectively in 2010). Unless there is a concerted effort by regulators and
industry players, capacity will remain a hurdle and the market will remain shallow, with limited
investment opportunities.
The vast majority of AuM (about 95 percent) in the region are concentrated in Brazil, Mexico and
Chile. Over the past four years, LatAm has grown at approximately 12 percent annually, mostly
driven by asset appreciation. Mexico, Chile, Colombia and Peru are still seeing growth in new
customers (affiliates of Pillar II pensions) and net flows. Profit margins have remained healthy, at
around 30 bps, despite some negative trends (e.g., pension pricing in Mexico will continue to
decline under regulatory pressure).
Growth in Brazil, both the largest and fastest-growing LatAm market, has been largely driven by
market appreciation. The investment mix here is less slanted towards fixed income, and alternative
products are growing faster than in other LatAm countries.
Mexico has been also seen healthy growth rates, driven by new affiliate/employee growth in the
Pillar II pensions segment, market returns and general economic prosperity. The future also seems
bright, as an upcoming generational shift could raise the level of sophistication in the market over
the next five years. Chile has seen double-digit growth of roughly 12 percent since 2007, with
independent players gaining importance.
Across the region, in retail (48% of the market), the primary clients of mutual funds and other
investments remain affluent and high-net-worth individuals. In Spanish-speaking LatAm, Pillar II
pensions could be a very relevant product for the middle class, particularly with their voluntary
offering, as these investors have less access to attractive investment options. However, the
economics of offering these products are not attractive to the average AFP/Afore agent, and
banks tend to push term deposits as a means to fund credit growth.

20

The institutional segment (52% of the market) is mostly comprised of AFPs/Afores (Pillar II
pensions), which invest directly in listed investment options, although the market is beginning
to open up to institutional mandates. Pension funds hold 64% of AuM, with open funds (EAPC)
continuing to gain share.
Investments are mostly concentrated in money market and fixed income products, particularly
in Mexico and Chile, where they represent around 80% of the market (this is mostly due to
historically high interest rates and limited financial education). In Chile, AFPs account for about
75% of AuM and in Mexico, approximately 55% of AuM.
The investment mix across the region is expected to slowly shift towards the more sophisticated
end of the spectrum. There are already high growth rates in private equity, asset-backed
securities, exchange-traded derivatives and development capital certificates in Mexico, with its
large Pillar II pension business that limits investments to publicly traded vehicles and assets.
Bank-related players still dominate the LatAm market, although new business models are
beginning to compete, particularly in Brazil. Independent players are gaining space, resulting in
competition both for assets and talent.

21

III. Seven growth trends and the


implications for asset managers
The global asset management industry, as stated earlier in this paper, is a shorthand for
describing a collection of regional markets. Actionable insights on growth clearly exist at the
more granular level. However, we can point to a number of global trends that are reshaping
growth in asset management along the dimensions of regions, segments and asset classes
and products. While it is difficult to predict how much these changes will impact individual
regions and markets, the following trends will heavily influence global industry growth over the
next three to five years.

Emerging markets win share of global AUM and profits


Over the past four years, annual AuM growth in emerging markets has outpaced developed
markets, 6.4% to -0.5%. Emerging markets will continue to increase their share of global AUM
and, if profitability holds, will account an ever-increasing share of global profits.
However, as noted previously, emerging markets are not immune to global forces, and
picking the right market is not an obvious exercise. In addition, as competition increases
from both local and outside players, investors become more sophisticated, and transparency
requirements become more stringent, profit margins of over 30 bps will increasingly come
under pressure. As a result, asset managers will no longer be able to rely on the strategy
of simply being present in booming regions. Instead, they will need to adopt a targeted
approach to the markets and channels in which they want to compete, strive for efficient
operations that can serve a very diverse marketplace (e.g., in terms of regulation, products and
distribution channels) and generate scale. In short, asset managers must build scalable and
economically viable business models to succeed in emerging markets.

Equities go global
As highlighted in the McKinsey Global Institutes recent report, The Emerging Equity Gap,
a rebalancing of global financial assets is underway with two profound implications for equity
investing. First, several factors are reducing investor appetite for equities in developed markets:
aging populations, the shift to defined contribution retirement plans, financial regulation, the
shifting risk budgets of institutional investors and the lingering effects on investor psyche of
weak and highly volatile equity market performance. Yet, even as developed market investors
reduce their overall level of equity investments, they are shifting from domestic to non-domestic
equities (e.g., to emerging and global equity products).
Second, emerging market financial assets are growing robustly and influencing the global
demand for equity products. While todays emerging market investors have historically kept
most of their assets in bank deposits and fixed income, their appetite for local equity products
will grow as they become more willing to put money at risk in order to achieve higher rates of return.

22

The net result of both trends is a globalization of equity products and managers (in a market
that has been dominated by developed market players with developed market equity products).
To win in markets that increasingly require emerging market and global equity product skills,
developed market asset managers will need to access credible local market expertise, either by
building capabilities internally or buying or partnering with local firms. They will also need to invest
in local distribution capabilities and balance the trade-offs between producing the products locally
or globally. Developed market players will also face the formidable challenge of counterbalancing
the decline in developed market equity, currently a significant driver of profitability. Local players,
on the other hand, must ensure they lead the pack in performance and product innovation, and
leverage preferred distribution relationships to maintain or increase share.

Fixed income specializes


Totaling 19 trillion in assets and accounting for about half of global assets, fixed income
represents the largest asset class in many countries around the globe. Through the crisis, global
growth for fixed income has remained strong, particularly in Continental Europe and Asia. In the
U.S., retirement markets will continue to be the primary growth engine for fixed income, especially
through target-date funds, which represent an increasing share of AuM and within which fixed
income is capturing a greater share of the asset allocation.
Nevertheless, across markets, the benign era for fixed income (fueled by slowly declining interest
rates globally) is likely over. Unexpected rising interest rates would exert considerable pressure
on asset values. Conversely, the anticipated prolonged low interest rate environment, coupled
with retirement trends, is magnifying the need for returns. This will drive increased demand for
high-yield, credit, multi-sector and absolute return strategies. In this scenario, asset managers
looking to preserve or increase market share in fixed income have two broad options: take
share in large but slow-growing core categories through excellent investment performance or
preferred distribution access; or invest to build or acquire capabilities in fast-growing categories.
In the institutional arena, one of these categories will likely include loan products (backed by
both retail and corporate loans), given the attraction of diversification into new, long-duration
credit assets, and the concurrent need for banks to reduce traditional lending in light of Basel
III. While institutional investors might lean toward creating these exposures directly (i.e., without
using asset managers as intermediaries), the lack of in-house skills will provide an opportunity for
institutional asset managers to fill the gap and capture an emerging opportunity.

ETFs enter their second act


Exchange-traded funds (ETFs) have grown explosively over the past 10 years, with total global
assets increasing by over 30 percent annually over the last decade and reaching roughly $1.5
trillion by the end of 2011. The market could double again by as early as 2016, fueled by investor
demand for cost efficient and liquid beta exposure and continued product innovation, including
active ETFs (slow growth to date, but some recent headline successes by marquee fund
managers,) ETF-based solutions and other new forms of ETFs.

23

However, regional markets are at very different stages of development. The maturing U.S. ETF
market ($1.1 trillion in AuM) and has seen solid growth driven by deeper channel penetration (i.e.,
growing acceptance by formerly reluctant financial advisors) and continued product innovation,
including intelligent index and active ETFs. Europes ETF sector (approximately $300 billion in
assets), is in an earlier stage of development and asset growth has slowed recently, partly due to
regional macroeconomic uncertainty and to unique product design challenges. Elsewhere, passive
ETF markets are growing fast, but from a small base. For example the Asia-Pacific ETF market
had total assets in 2011 of roughly $60 billion.
Much of the global growth for ETFs will continue to come from passive products, directly
benefitting existing global ETF leaders with significant economies of scale. Beyond assessing
the threat to their existing businesses, asset managers around the globe need to assess the
opportunities for growth presented by ETFs, including taking a fresh look at the potential for active
ETFs and for wrapping ETFs into multi-asset class products and solutions.

Alternatives go mainstream
After a drastic decline during the financial crisis, alternative investments across retail and
institutional segments rebounded, doubling in size between 2005 and 2011, to 5 trillion in
global AuM. Growth is expected to continue as alternative investments comprised of
investments in hedge funds and private equity funds, and in real estate, infrastructure and
commodities, in a variety of vehicles including limited partnerships, fund of funds partnerships,
and managed accounts in mutual funds, ETFs and UCITs move into the asset management
mainstream. This shift is being spurred by three trends: the adoption of alternatives by retail
investors, the convergence of asset classes and investment products, and a broader movement
from relative return to absolute return benchmarks. It remains to be seen how much increasing
regulatory pressure will counterbalance these favourable trends.
This mainstreaming effect should drive a significant portion of industry growth over the next
few years, particularly in the retail channel. In the U.S. retail market, for example, alternative
investments will account for 13% of industry assets and 25% of industry revenues by 2015 (up
from 7% and 14% today).
To capture some of this growth, traditional asset managers will need to plan targeted development
initiatives, focusing on one or two asset classes; access credible investment capabilities (either
through building, buying or partnering); refine channel strategy; and overinvest in sales and client
service, particularly in education and improving risk management and reporting capabilities.

Solutions reshape the way money is managed


Poor performance through the financial crisis, prolonged low interest rates and high volatility in
equity markets, and pension restructuring have led many institutional investors to change how
they interact with asset managers and investment consultants and adjust their thinking concerning
portfolio construction. Many have sought out partnerships with asset managers that extend
beyond traditional single asset class mandates and are looking for more holistic, strategic advice
and support that spans across the spectrum of asset classes.

24

Investment solutions, broadly defined as products engineered to help clients address specific
opportunities or needs, have quickly gained attention in the asset management industry. Threequarters of asset managers recently surveyed by McKinsey anticipate that objective-oriented
investment solutions and products will grow faster than traditional products. Survey respondents
further expect institutional solutions to account for more than one-quarter of flows over the next
three to five years. In line with these expectations, 85% of asset managers consider investment
solutions a top-three strategic priority and are investing heavily to build these capabilities.
Investment solutions are typically implemented in one of two ways: as holistic solutions, with the
asset manager partnering with the institutional investor to diagnose and address needs specific to
their portfolio; or product-driven solutions, where the asset manager develops products that help
address broader needs. In the latter, target-date funds are the most successful standardized solution.
Despite the clear demand for investment solutions, most asset managers are not well-positioned
to offer them. To win in the space, they will need to make enhancements to their investment
management function (e.g., create a Solutions CIO role to work across the organization),
retool their distribution teams (e.g., give distribution teams the skills to move from product-led
conversations to needs-based conversations), and embed technology as a core component in the
investment decision-making process.

Retail is down in Europe, but not out


The retail sector has traditionally been a major source of profitability, accounting for example,
for 70% of asset management industry profits in Europe. Of late, however, retail has been under
significant stress. Globally, the share of personal financial assets in mutual funds has fallen from
16% in 2004 to 12% in 2010, with net outflows continuing in 2011. Europe has been particularly
hard hit, with retail profits (in both absolute values and basis points) approximately 40% lower than
in 2007. By 2015, the European retail market will have contracted further with profits declining to
4 billion to 5 billion, roughly half what they were in 2007.
The cause of this precipitous decline, at least in Europe, is the dramatic retreat by banks (the
primary distribution channel in Continental Europe) from the sale of mutual funds as a result of
regulatory changes, a push for deposit products, and reputational concerns. In addition, the
opening up of the distribution landscape is intensifying the pressure on captive asset managers: in
Western Europe, five players with independent brands captured over 60% of flows in 2011.
On the brighter side, global personal financial assets have fully recovered from the financial
crisis and are expected to reach 29 trillion by 2015, an increase of over 20% from 2011. This
represents a significant opportunity for asset managers who can adapt to an environment buffeted
by continuing capital market volatility and regulations, and with no mandatory long-term savings/
pension scheme on the horizon.
To regain share in the growth of personal financial assets, European asset managers need to
rapidly adjust their business model by upgrading their distribution approach (including direct
distribution), establishing a retail brand and positioning themselves as providers of savings solutions.

***

25

Despite a volatile and uncertain macro-economic environment in 2011, the asset management
industry continued to outperform other financial services sectors. Viewed over the past few years,
however, the asset management industry as a whole does not present a picture of robust health.
Globally, industry assets are growing at a slower pace than total financial assets, net flows remain
anemic and profits have declined substantially. By a number of measures, the current post-crisis
recovery compares unfavorably to the previous market cycle.
Restoring profitable growth is the most pressing priority for the industry. But therein lies the
challenge: a more granular perspective reveals there are opportunities for growth, but they
are highly concentrated and require more targeted investment. The great challenge for asset
managers in the coming years will be to make informed, granular choices about where to grow
by geography, by client segment and by product or solution. Most importantly, players will need
to move beyond analyzing the opportunities to selecting a few trends to exploit and investing
firmly behind those choices. To date, few firms have acted with this level of conviction, but it is an
imperative for those that hope to thrive in the coming years. Overall, the environment will tougher,
with fewer players enjoying the growth rates and profitability of past years. Some players are likely
to disappear altogether. Winning firms will be those that understand the granularity of growth in
asset management, and make the changes necessary to meet the challenge.
Pierre-Ignace Bernard
Salim Ramji
Markus Schachner
Nancy Szmolyan
Kurt MacAlpine
The authors would like to acknowledge the contributions of McKinsey's financial institutions
practices globally in building this report. Our special thanks go to partners Maria NovalesFlamarique and Raj Kamal, and to the working team: Manu Balakrishnan, Paul Feldman, Owen
Jones, Etienne Mayor, Raksha Pant, Francesca Rizzi, Achim Schlitter and Manit Seth.

26


McKinseys proprietary Asset Management Growth Cube Model analyses asset growth, flows,
revenues and profitability on the dimensions of regions, client segments and asset classes
Note: not all metrics available for countries and products and clients and channels

Regions/Countries
Overall, ~1,000 Datapoints
Metrics
AuM/AuM growth
Net flows
Profitability, revenues, costs
Timeframe
From 2007
Projections to 2015 and beyond

North America (2 countries)


Latin America (4 countries)
Western Europe (17 countries)
Central & Eastern Europe (7 countries)
Africa & Middle East (3 countries)
Asia excluding Japan and Australia (8 countries)
Japan & Australia

Asset Classes/Products/Vehicles
Asset classes
Equity
Fixed income
Money market
Balanced
Alternatives

Vehicles
Open mutual funds
Unit-linked life/VA
ETFs
S
 MAs, UMAs & wrappers
(U.S. only)

Client Segments/Distribution Channels


Retail distribution channel
Client segment
Europe:
Retail
Defined contribution - 3rd-party vs captive
U.S.:
Institutional
- Wirehouses
- Insurance
- DB/DC Pension funds - Broker dealers
- Financial corporates - IFAs & registered advisors
- Insurance
- Corporates
- SWFs & state entities - Discount
- Non-profit

27

About McKinseys annual global asset management survey


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than 2,000 business metrics for over 300 firms from the U.S., Europe, Asia and Latin America,
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28

About McKinsey & Company


McKinsey & Company is a management consulting firm that helps many of the worlds leading
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growth to improving business performance and maximizing profitability. For more than 80 years,
the firms primary objective has been to serve as an organizations most trusted external advisor on
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Our partners and consultants have deep expertise in all facets of asset management in every region
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To learn more about McKinsey & Companys specialized expertise and capabilities related to the
asset management industry, or for additional information about this report, please contact:

Europe
Pierre-Ignace Bernard
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Matteo Pacca
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North America
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29

Geraldine Buckingham
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Nancy Szmolyan
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Asia-Pacific
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Stephan Binder
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Tab Bowers
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Keiko Honda
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Raj Kamal
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Joseph Luc Ngai
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Naveen Tahilyani
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Latin America
Rogerio Mascarenhas
T: +55 (11) 5189-1531
E : Rogerio_Mascarenhas@mckinsey.com
Maria Novales-Flamarique
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Middle East
Laurent Nordin
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Hans-Martin Stockmeier
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Further insights
McKinsey publishes frequently on issues of interest to industry executives. Our recent reports include:
The mainstreaming of alternatives: Fueling the next wave of growth in asset management, June 2012
Check or checkmate: Game-changing strategies for the asset management industry, June 2012
Retail customers: The great misunderstanding, December 2011
The emerging equity gap: Growth and stability in the new investor landscape, December 2011
(The McKinsey Global Institute)
The second act begins for ETFs: A disruptive investment vehicle view for center stage in asset
management, August 2011

McKinsey Asset Management


June 2012
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