February 24, 2013 4:14 am

Sunny uplands ahead but map is essential

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A portrait of Lord John Maynard Keynes©AP

John Maynard Keynes: excited by animal spirits

Is the global asset management industry finally headed into the sunny uplands, with a chance that industry assets will cross $60tn by the end of the year?

As treacherous as it has been to make any predictions – and be right – about industry growth over the past five years, the overall size of the industry appears to be on an upward trajectory.

We should, however, not get too far ahead of ourselves. Even as top-line growth may appear robust, the global industry faces substantial headwinds, putting considerable pressure on bottom-line performance.

For those of us who have an interest in keeping count, the global asset management industry lost a total of $10tn in fewer than four months during the financial crisis in 2008, and it has taken the industry the better part of the last five years to get back to where it was at the end of 2007.

At the end of last year, global professionally managed assets stood at roughly $56tn, and if all goes well this year, $60tn seems a fair shot.

As I write this on a cold and crisp February morning, I am less excited about the fact that the world’s stock markets have had a very positive start to the year, that what the events of the past six weeks will do to overall sentiment, or what John Maynard Keynes called the “animal spirits”.

Confidence has been the missing not-so-secret sauce for the past four years, and an even partial return of these animal spirits will almost single-handedly make a big difference to the industry having a good or an average year.

Combine this with the fact that the US, which is the asset management industry’s biggest market (it still accounts for half of global assets), has seen good growth over the past 12-18 months, and I am mildly optimistic about the global industry’s prospects in the near term.

Little surprise then that some of the world’s biggest non-US managers have their eyes firmly set on the US rather than trying their luck eastward where, while over the very long term the prospects are certainly dazzling, fragmented markets, high cost of operations and a plethora of competitive alternatives have confounded all but the most able, patient and deep-pocketed firms.

For sure, the US is no easy nut to crack, but combined with the other developed markets, it still accounts for more than 80 per cent of global assets under management (yes, even Europe is still the biggest asset management region after the US), and in an industry where it is increasingly about scale, the logic of chasing gains in the US is increasingly obvious.

As the biggest international managers battle to combat the effects of the global financial crisis and its aftermath, it has been a real balancing act between focusing on the core business in home markets, and seeking long-term adventure in more exotic locales. Many who pinned their hopes on profitability in faraway places, are now seeking solace closer to home.

Yet, should anyone believe that this commentator thinks the tough times are behind us, then you would be wrong. The biggest worry I have for the next few years is not about how the top-line of the industry is growing, especially if it continues to head in the right direction, it is the fact that the bottom line is just not keeping pace.

Globally asset management revenues are at about $160bn, lower than where the industry was in 2007, and I would be hard pressed to find anyone who truly believes that industry-wide revenues of $200bn are in our sights until we are well into the last quarter of this decade. The simple fact is that the asset management market has had to get used to doing a lot more with a lot less, which is probably no bad thing. Margins have been under pressure, and there is little to suggest that is going to change any time soon.

The cost of regulation, the cost of distribution and the revenue impact of passive products on an increasingly beleaguered active industry are among the big issues the global asset management industry faces every day from America to Australia, and everywhere in between.

So while the sunny uplands may beckon, it needs to be one step at a time. Picking the right direction of travel is as important as ensuring you avoid the hidden, and not so hidden, pitfalls. Good quality navigation and adept map-reading skills are now more essential than ever.

Shiv Taneja is the London-based managing director of Cerulli Associates

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