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Winning asset management and investment strategies

Successful financial management in a post-pandemic era

2022 was a year of substantially down equity and bond markets, historic inflation, geopolitical instability, and recovery from a pandemic. As investors in the asset management industry rethink investment strategies and portfolios, how can asset managers overcome business challenges, maximize transformation opportunities, and reach financial success?

Separation from the pack: Successful financial management

The last time the industry experienced this kind of disruption was during the global financial crisis (GFC) of 2007–2009. In the decade that followed, we witnessed a critical shift in the competitive landscape that we had not seen before in the asset management industry: a select group of winning firms using the crisis as an opportunity to separate themselves from the pack. Our research suggests there is much to be learned from this era. Our aim is to isolate the strategies that winning firms deployed and provide a useful framework to guide asset management executives today as they look toward the next decade.

The GFC: An industry inflection point

We analyzed 50 of the largest asset managers globally in the decade following the GFC. This group represented slightly more than 55% of the industry’s total revenues as of year-end 2009 and grew to slightly more than 60% by year-end 2019. But an interesting phenomenon, which we did not observe meaningfully in the periods preceding the GFC, emerged clearly in the research: Winning firms represented all of the net consolidation gains and then some. Winning firms—which we define as those that grew net new revenues (revenues associated with positive net flows) at a rate greater than the industry average for the 10-year period and amounted to about 20 firms in total—grew their total industry revenue share from 24% to 32%. These firms also exhibited superior financial performance in other critical metrics that have helped separate them from the pack—they grew annual dollar profits at a 10% rate (versus 8% for others in the sample) over the 10-year period, exhibited 1.3 times higher productivity (as measured by revenue per full-time equivalent) as of year-end 2019, and invested 2% more of their revenues each year in technology as of year-end 2021. Interestingly, winning firms varied in size and type—alternatives, passive, fixed income, and solutions-focused firms, for example, were all represented.

Winning firms are better at executing on business transformation strategies. Whether it was better investment in scale or the client experience, developing investment capability adjacencies, or pursuing acquisitions, winning firms in the decade following the GFC were characterized by their ability to execute on transformation. Executing on change always requires vision and relies on the boldness and decisiveness of leadership. Firms that are effective at transforming themselves are led by visionary leadership teams that embrace strategy and innovation as a daily routine and are willing to break down organizational silos to effect change. Leading firms clarify and communicate their vision and long-term goals, prioritize and focus their investments, resource their investments with dedicated project leadership, set reasonable milestones/key performance indicators (KPIs) and hold themselves accountable, align and incent desired behaviors across the organization, and dynamically adjust their business transformation strategies by investing behind success and cutting losses when necessary.

Winning firms acquire CEOs who take ownership of the data and technology vision of their organization. CEOs who recognized that data and technology were critical to their firms’ competitive advantage were able to separate their firms from the pack. These CEOs embraced data and technology as essential to achieving the firm vision, elevated technology (and operations) leadership as equal partners and collaborators with the business, and significantly invested to drive innovation and improve data and technology foundational capabilities. Critically, these CEOs are challenging the core business implications of technological choices and prioritization and, in turn, instilling an enterprisewide culture of innovation and tech fluency.

Winning firms prioritize progress over perfection in their evolution. This means embracing change as a normal course of business, where all members of the organization participate in continuous improvement and embrace an agile mindset. At these firms, operating model changes are made iteratively, supported by proactive change management to drive adoption while continually seeking to incorporate lessons learned in near real time to enable further improvement. Leaders instill a culture of smart risk-taking—expecting and embracing failure and rewarding progress and small victories (versus major milestones) through additional funding and recognition. These firms build agility in their teams and how they approach program execution; are diligent about pausing lagging projects to shift resources toward high-value programs that drive growth, efficiency, simplification, and scale; and are migrating away from waterfall or annual program funding.

Based on our extensive research and experience working with many of the leading firms over the past several decades, these firms possessed three essential ingredients:

  1. Effective investment in growth
  2. Modernization of operating models
  3. Successful financial management

These three ingredients for success will remain largely the same in the coming decade. However, the best playbooks for the next decade will need to account for both the changing competitive landscape that has emerged since the GFC and the unique changes in the current operating environment. We are facing a very different investment environment, and business models are being redefined: Cultures are adapting to the emerging hybrid work environment, operating models are being reimagined, and deglobalization and fragmented regulation increasingly challenge firms’ legacy models. These changes present an opportunity for managers to recalibrate their strategy and define how they will compete to win in the next decade.

Three Essential Ingredients for Success

Ingredient No. 1: Targeted investment in growth

Winning firms are better able to target growth opportunities. A clear view of structural changes in the investment environment and future buyer demand shifts are central to identifying future opportunities. Coming out of the GFC, some tailwinds appeared more evident than others. Low rates and banks reducing their lending, for example, fueled growth opportunities in active fixed-income and private-market strategies. The investing experience during the GFC changed perceptions around the value of active investing, fueled a substantial shift from active to passive investment approaches, and drove the popularity of the exchange-traded fund. The rapid growth in individual-driven markets, including retail, wealth, and retirement, rewarded firms that were best able to pivot their businesses into these segments. Winning firms successfully identified these growth tailwinds early in the cycle to harness superior growth.

Ingredient No. 2: Operating model modernization

The second substantial initiative that winning firms embraced in the decade following the GFC was a willingness to disrupt the status quo of how their businesses operated. These firms embraced new and innovative capabilities that improved their investment processes, product quality, investment returns, client experience, sales productivity, operational efficiency, client tenure, business decision-making, internal controls, and talent experience. Over the past decade, operating model changes were motivated by aspirations around growth, flexibility and business agility, improved scale, and reduced cost and risk. Looking forward, leading firms will aggressively seek to further simplify and modernize their operating model and reorient core activities around client preferences, rather than traditional business functions or products.

Ingredient No. 3: Financial management discipline

Asset management remains one of the most financially attractive industries in the world: Median profit margins north of 30%, very healthy levels of compensation, revenue growth tied to typically rising capital markets, and high cash-flow-generating/low capital-intensive business models. However, it is these very characteristics that can encourage poorly conceived spending policies. For winning firms, the decade following the GFC was one of incorporating more robust financial management disciplines to improve profitability and successfully free up cash flow for reinvestment. As fixed costs in the industry rose (for example, non-compensation and benefit costs have risen from representing, on average, 22% of revenues during the GFC period to more than 30% of revenues in the past five years), winning firms established a fit-for-purpose operating model, created a culture of financial accountability and stewardship, and provided a robust financial toolkit to arm business leaders to make sound decisions.

Capitalizing on disruption

The decade following the GFC permanently rearranged the asset management industry’s competitive landscape. A select group of firms demonstrated that acting boldly and decisively was a winning formula. But future success for these same firms is hardly a foregone conclusion—investors’ needs change, and their search for the best products, solutions, and partners is constant. The firms that best execute on building visions with enduring competitive advantage, investing successfully in targeted growth areas, modernizing their operating models to deliver outstanding client experiences, and leveraging strong financial management disciplines will be the asset management industry’s winners in the next decade.



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