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ANALYSIS: Margin pressure points to more fund group M&A

The headlines say fund groups’ profits fell, but what else can we learn from McKinsey & Company’s Asset Management 2017 report into the European funds industry?

While worldwide profits for ‘traditional’ mutual fund groups fell 2.9% to €66bn, total assets under management actually grew to €66tn.

The AUM growth certainly chimes with recent results from the likes of Standard Life Investments and Jupiter, though revenue margins across the industry supposedly declined by around 7% for European firms.

Margin pressure is a very real threat to the sustainability of some firms, particularly given the threat from passives providers and the supposed ‘price wars’ battering the industry.

The report’s authors outlined what they see as an end to ‘supernormal’ returns in the likes of equities and fixed income, which they say will put pressure on margin levels of traditional product ranges.

This may explain why asset managers have spent the past few years bolstering their multi-asset and absolute return teams, on the assumption that equities and bond returns will one day return to negative territory.

With this in mind, the report also predicts a ‘shakeout’ of active management, with inflows concentrating around passives, alternative funds and solutions-based investing.

Another key structural shift identified by the authors is increasing distribution complexity. The report says that with retail distribution is under attack from customers becoming more self-directed, which suggests more fund groups could look to the, perhaps neglected, revenue streams of DTC business.

The report also points to the growing influence of regulation, with consumer protection at the top of regulators’ agenda through the likes of MiFID and PRIIP legislation.

Given how long groups have had to prepare for such changes, shareholders are unlikely to accept regulation as a big factor behind their diminishing profits.

 

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