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A severe squeeze on profits over the next five years will drive many mid-sized asset managers out of business and force those that survive to restructure operations, according to Bain.

The consultancy forecast that profits earned by 150 of the largest traditional fund houses globally would tumble 12 per cent from €92bn in 2017 to €81bn by 2022 as stricter regulations, rising costs and the end of ultra-low interest rates drive up competition.

It also expected that the top 10 managers would win a larger share of industry profits, making it hard for smaller players to survive. “A collapse of smaller or mid-sized plain-vanilla firms with no competitive advantage is a highly likely scenario,” said Matthias Memminger, a Bain partner.

The squeeze on fund managers’ profit margins is expected to be even more intense. Profits measured as a share of assets are forecast to decline by an average of 7 per cent a year until 2022. This would leave profit margins at just 8.3 basis points, below the trough of 2008.

Mr Memminger said an “escape from this valley of death” was possible by two routes.

Managers could “go big” through mergers and acquisitions to build scale in either active or passive strategies. “M&A is a promising option to increase assets in a fragmented market, either through add-on deals or via a merger of equals,” said Mr Memminger, pointing to the deals that created Janus Henderson and Standard Life Aberdeen.

The second route would require managers to carve out niches that could deliver high alpha [market-beating returns] and command higher fees. Nordea of Sweden, Zurich-based RobecoSAM and Candriam, the Franco-Belgian manager, have pursued this path.

Multi-asset strategies, socially responsible investments and alternatives including hedge funds, infrastructure and real estate still stand out as attractive opportunities for Bain.

“All of these strategies can command higher fees if executed well but they require distinct capabilities. Managers need a clear-eyed view of where they should play and how they will win,” said Mr Memminger.

Gavin Weir, a London partner in White & Case, the US law firm, said asset and wealth management was the most fragmented financial sector globally and that consolidation was accelerating.

Macquarie, the Australian financial services provider, last week expanded its presence in Europe with the acquisition of ValueInvest, a €3.7bn Luxembourg-based global equities manager.

“Megamergers also remain a strong possibility,” said Mr Weir, adding that new regulations, competition from fintechs and the expectations of cost-conscious retail investors would drive more managers to pursue deals to achieve economies of scale. “The global financial crisis is behind asset managers but the new challenges are no less daunting,” said Mr Weir.

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