Bear Market

The bear market will lead to a proportional decrease in regular fund fees and severe cuts in performance-based fees, according to Boston Consulting Group (BCG).

In a recent report, the consulting group said four factors will lead to lower, or at least more volatile, fees: the bear market; margin pressure because of increased investor skepticism; a rising share of performance-based fees; and an increasing share of low-margin products.

The report also says the value of professionally managed assets rose globally in 2007 by 13.9% to $58.9 ­trillion. Growth was particularly evident in the Asia-Pacific region. China, for the first time, broke into the ranks of the top 10 global markets with roughly $900 billion in AUM at the end of 2007. However, BCG said that China might not maintain that status in 2008, given the precipitous fall of its equity market.

BCG also noted some growth in alternative products. Exchange-traded funds (ETFs) are growing about three times as fast as other passive products, the firm said. Innovative or alternative products (including real estate, private equity, hedge funds, and other categories) accounted for about 16% of professionally managed assets.

However, the share of global AUM allocated to passive fixed-income and equity funds (about 8%) is still six times as much as the amount allocated to ETFs. Overall, the global share of core asset-management products—actively managed equity and fixed income, plus money market vehicles—was 74% in 2007.

Looking Ahead for Asset Managers

Despite market turmoil, there still will be investment demand—such as in the retirement market.

The past year has been tremendously difficult amid hypersensitive markets and extraordinary events on Wall Street and in other financial centers, and 2009 promises to be at least as challenging, BCG said. However, the firm says the fundamentals of the asset-management business remain positive, and asset managers need to focus not only on weathering the crisis but also on positioning themselves for the next growth phase.

According to BCG, key factors for success in rebounding from the subprime crisis will be addressing client needs better through improved distribution practices and enhanced risk management, as well as containing costs. It also will be critical for asset managers to explore new growth opportunities, particularly in Asia-Pacific and Brazil.

“It is safe to say that opportunities for asset managers still abound,” said Philippe Morel, a Paris-based senior partner and a coauthor of the report. “For example, many investors, having moved into cash vehicles as a safe haven, will be looking to put those funds back into actively managed investment products when confidence in the market fully returns, however long that may take. Aging populations still will need their retirement funds looked after. Potential profit pools in many regions, especially Asia-Pacific, are growing.”