Old challenges push asset managers to inflection point: Citi

Asset managers continue to face existential challenges amid the rise of passive funds, fee compression and difficulty in generating alpha, a new report from Citi shows, forcing them to rethink their business models and value propositions in the future.

The report, Rebooting the Global Asset Management Industry produced in conjunction with CREATE-Research, lays out many issues facing asset managers, with the majority (61%) citing the threat of passive investing as a key challenge.

More than half of the 269 global asset managers surveyed, including ones from Australia investing in public and private markets, said fee compression has been accelerating. A similar number of managers claim costs have been rising faster than revenues.

Market performance has been the key driver of top-line growth for half of asset managers. Almost half said alpha generation is difficult given unfamiliar risks from Covid-19, the Russian invasion of Ukraine and the spike in inflation.

"As if that were not enough, new external factors have emerged alongside to drive up costs. End-clients have been demanding new products, especially in the ESG space (45%)," the report read.

"Digitally savvy self-directed investors need superior tech-enabled client experience (42%). Tighter regulatory oversight has come with the personalisation of risk (44%)."

These challenges have brought the industry to an inflection point and will likely see further consolidation via mergers and acquisitions.

CREATE-Research chief executive Amin Rajan said the "profit dynamic is worsening with the rise of passive funds."

"Defined benefit pension plans are now derisking with ageing demographics. The investor base is shifting towards a new generation of digitally savvy investors with radically different needs from their predecessors," he said.

"Technology is advancing in leaps and bounds. Regulators are become onerous with the personalisation of risk. Markets are in a low real return era after the longest bull run in history."

There are however potential growth drivers that asset managers can embrace.

Sixty-seven percent said the democratisation of private markets is a key driver of future business growth. The majority also believe there is opportunity in the intergenerational wealth transfer.

In the future, "winning models" will shift from aggressive product push to meeting clients' unique needs.

"As active managers continue to face headwinds from the rise of passive funds, the old fund charges based on fees as a fixed proportion of assets under management will likely continue to be replaced by a low base fee and a performance fee based on the preset hurdle rate (59%)," the report read.

Client centricity will likely lead to providing personalised portfolios and improved client experience facilitated by the rising adoption of AI and GenAI (57%).

Small and medium-sized asset managers in private and public markets alike are revamping their operating models to retain and enhance their alpha credentials.

"They believe that the rise of passive funds is unlikely to diminish the appetite for alpha among large institutional investors, such as insurance companies, foundations, endowments, and pension funds," the report said.

Overall, alpha potential will likely prevail for asset managers creating leaner and more agile operating models via new technologies and outsourcing to succeed.

Citi global head of investor services Chris Cox said the asset management industry stands at a crossroads as traditional pressures are not abating and at the same time new growth vectors and technologies seem to widen the gap between those with the capacity to respond and those without.

"We are particularly encouraged by the growing recognition that outsourcing is no longer just about efficiency - it's about enablement," he said.

"By putting investment where it creates most enterprise value (e.g. portfolio management and distribution) and delegating non-core functions, asset managers are freeing themselves to focus on what appears to truly differentiate: investment performance, client engagement, and with growing importance, innovation."