Three types of firms made the most of another banner year in European asset management. Lagging performers should take note.
Europe’s asset-management industry enjoyed its ninth consecutive year of record performance in 2017: assets under management (AUM) rose by 8 percent, to €22.5 trillion, one of the best showings since the financial crisis. The global industry reached new highs as well, powered by strong performance in many of the world’s stock markets (Exhibit 1). For Europe’s asset managers, net new inflows from clients came to €581 billion, 3 percent higher than those of the previous year—complemented by a 5 percent gain from market performance. Overall AUM growth was in line with the average 8 percent pace of the past few years (Exhibit 2).
Typically, institutional investors (70 percent of the European industry’s AUM) have propelled growth from net flows, but in 2017 the inflows from the retail sector reached 5 percent, versus just 2 percent from institutional clients. Across Europe, most country markets enjoyed strong new cash flows. Large contributions came from the United Kingdom (5 percent gains from retail and 4 percent from institutions) and Germany (7 percent and 3 percent, respectively).
Peak AUM levels carried through to the European managers’ revenues and earnings, which set records in 2017. From 2007 through last year, average AUM increased by 62 percent overall, revenues by 56 percent. Profit margins among Western European managers rose to 13.0 basis points of average AUM for the year, up from 12.1 in 2016. Measured against net revenues, profit margins reached 37 percent (Exhibit 3). Profitability in most country markets was higher as well, and some surpassed their pre-crisis high-water marks: in Germany, for example, profit margins hit 18.3 basis points of AUM, versus 16.9 in 2007.
Europe’s asset managers achieved these numbers despite significant shifts in the industry’s economics. Both institutional and retail clients have increasingly migrated away from traditional actively managed strategies, and that has gradually eroded the revenue margins of asset managers. And while their costs continue to rise in the aggregate—particularly at the compensation line—the considerable expansion of the managed asset base helped drive down cost margins. Still, the industry remains vulnerable to a significant downturn in markets.
Looking ahead, the industry faces three important long-term dynamics: the continuing shift away from traditional products to lower-cost options (for instance, from active to passive) and to alternative asset classes, the changing expectations of both retail and institutional clients, and the impact of data and advanced analytics on the full investment-management value chain.