The growth rate in assets under management in Asia plunged to 5% last year, compared with average annual growth of 15% between 2011 and 2017, according to the report.
The authors attribute the sharp decline primarily to weak Asian equity markets and geopolitical uncertainties, which hurt investor confidence. Profits also plunged, growing at 3% in 2018, down from an annual average of 14% during the previous six years.
“We don’t see this decline as merely a temporary blip,” Fumiaki Katsuki, a McKinsey partner and one of the report’s authors, told FSA.
“Certainly the pool of assets under management in Asia will continue grow, but the anxieties that shaped sentiment last year are likely persist in the near future too,” he added.
“So, now is a good time for asset management companies (AMCs) to adjust and improve their operating models in order to reduce costs, embrace new technologies and offer better products to their customer base.”
McKinsey emphasised that Asia still dominates the global asset management industry expansion, having attracted around 56% of cumulative global flows for the five-year period 2013-2018.
The region’s continued dominance was driven by the expansion of AUM in emerging Asia, which enjoyed a 10% increase in 2018, and accounted for 85% of all Asian inflows. In contrast, inflows to developed Asia (Australia and Japan) declined 0.1% and fell 0.3% in developing Asia (Hong Kong, Singapore and South Korea).
About 93% of those emerging Asia flows (including into money market funds) were from mainland China, spurred by strong retail demand and recent regulatory changes that have encouraged foreign firms to set up local ventures to serve institutional and accredited investors, according to the report.
Annual growth of mainland China AUM has averaged around 20% during the past decade. China is likely to maintain momentum, which was given a boost recently by official initiatives to allow global firms access to the country’s public fund market.
“However, AMCs will need to align their product offerings more closely with the specific requirements of different segments of the regional market in order to maintain competitiveness. They cannot simply respond, but must be proactive,” Vishal Kaushik, a McKinsey senior knowledge expert and also a co-author of the report, told FSA.
For instance, ESG offerings for wealthy individuals and institutional clients; liability-driven investments and outsourced chief investment officer providers for insurance companies and pension schemes; mass-commoditised products, such as retirement funds, for digital aggregators.
High margins, but rising costs
Asian profit margins of 22.5 basis points of average AUM are still heady, far surpassing those of North American (11.1bps) and Western European (12.3bps) counterparts. But, those margins will be unsustainable as the region’s asset management industry’s product mix trends towards the low-fee offerings that characterise the industry in the mature markets of North America and Europe.
“The high profit margins enjoyed by Asian AMCs are a result of the large fees generated from the type of products that remain popular in the region. Actively-managed funds are still preferred over passive funds such as ETFs,” said Kaushik.
Furthermore, costs, which are already high in Asia compared with Europe and the US because of expanding sales and marketing budgets to promote new fund launches, are set to rise further to meet increasing regulatory and compliance requirements, and to replace obsolete technologies and legacy systems.
“Small asset managers, in particular, will need to find opportunities for partnerships and consolidation to scale up and create synergies. This is especially important as AMCs assess cross-border vehicle options in response to their clients’ demand for broader regional and global access,” said Katsuki.
“Meanwhile, all AMCs should embrace the productivity gains from digitising their operations.”
Asia AUM growth