Welcome to the eighth edition of 10 Ideas In Asset Management. By many measures, 2024 was a tumultuous year: heightened geopolitical tensions, catastrophic weather events, widespread social upheaval, and challenges to the liberal democratic world order. Most markets shrugged these off — particularly in the US — as inflation came under control and the prospect of easier policy (first the monetary and now the regulatory sort) has turbocharged a two-year trend that has flattered asset managers’ businesses. But underneath the “up and to the right” facade, interesting trends are brewing that will shape the industry in 2025 and for years to come. For our ideas on what these might be, we invite you to read on.
1. Integration becomes integral
As clients’ needs evolve to demand more holistic solutions and seamless experiences, integrated firms with a range of capabilities including product manufacturing, distribution and advisory, asset servicing and administration, and risk intermediation, are well positioned to assemble solutions to better meet these (unmet) needs. To date, few, if any, have exploited these advantages. That will change as firms get serious about breaking down business silos, unifying data models, aligning around enterprise incentives, and reorienting their operating models to create solutions that reflect clients’ preferences, not outdated organizational structures. The $400 billion retirement market is the model use case for an integrated approach — serving it well requires pulling together asset management, advisory, insurance, and technology capabilities.
2. Public and private melding
Investors want reliable outcomes at the best price. Delivering those results belongs solely to neither public assets nor private assets — each has a role to play. Asset managers will blend listed and unlisted securities — with credit products first in line — to build better outcomes, with higher risk-adjusted yields, improved liquidity terms, and attractive fee levels. We expect that semiliquid pooled vehicles, where assets have grown 19% compounded annually since 2018, will keep improving (looking at you, European Long-Term Investment Fund); better technology will facilitate custom delivery; and exchanges will build necessary infrastructure, including secondary markets. It won’t be easy: Structuring, selling, and pricing innovative cross-capital products are challenges that a growing number of partnerships and mergers designed specifically for these offers will need to address.
3. Seed or secede
Insurers maximize value of their asset managers. As insurers scour for sources of growth, they will take more dramatic steps to unlock the value in their asset management businesses, which collectively manage $9 trillion of assets. This will happen in one of four ways: (1) go “all-in” on asset management and restructure the business to become an “asset management-led insurer” focused on originating (or reinsuring) liabilities to fund their investment strategies; (2) aggressively utilize seed capital programs and find creative ways to leverage the balance sheet to turbocharge growth of investment strategies; (3) create an internally-focused “asset management utility” to manage the general account and/or serve the specific needs of the enterprise; or (4) monetize the value of the asset management through a spinoff/sale and plow that cash back into their core business.
4. Differentiation equation — distribution value greater than investment value
Investment performance will continue to matter, but its role as a differentiator will decline for all but an extremely small number of managers in the industry. For the vast majority, the winning formula will become exceptional distribution and relationship management combined with “competitive” performance. It is not uncommon for firms to spend up to 80% of their technology budget directly supporting the investment engine, and investment teams to contribute to approximately 50% more of the total comp expense than distribution teams. Going forward these disparities are going to moderate with a greater share of dollars going towards enhancing distribution and relationship management capabilities. That next generative AI use case rollout, advanced data and analytics investment, or star senior hire? It may not go to the investment engine.
5. Managers reassess international footprints and go “glocal”
Despite extensive (and expensive) efforts, most asset managers in the US and Europe have failed to dramatically raise the portion of their assets managed for clients outside their region. Among large asset managers, the average foreign-client share dropped from 23% to 21% since 2018. Scalable export of investment products has been challenging. Local clients favor products that feel homegrown, and hometown firms have upped their games, while international distribution costs have ballooned without producing results at many firms. These poorly performing foreign forays will not eliminate global ambitions, but they will prompt managers to shift costs from a wide range of countries into a select few where they’ll build (organically and inorganically) larger, more local-looking product sets and business models.
6. Quant strikes back
The pressure on active management continues to intensify, raising concerns about the future of many active investment management businesses. This pressure stems from factors such as claims of mediocre performance, declining fee levels, and rising production costs. However, asset managers will increasingly recognize the advantages of systematic investment strategies that harness quantitative tools and signals to create efficient portfolios at scale and at significantly lower pricing. By integrating quantitative portfolio construction tools into fundamental strategies, firms will reduce production costs by up to 30% to help reenergize their active franchises.
7. Direct dial for dollars
After decades of letting intermediaries and investment consultants support scalable but standardized distribution, asset managers increasingly find themselves relegated to providing commoditized components through intermediaries, incurring high client acquisition costs, and gathering little knowledge about their end users. Direct distribution strategies aren’t retro — they will become necessary methods for collecting data and building deeper understanding of needs, which are vital for designing client-specific outcomes. Captive and direct approaches also carry services and advice that can keep clients when performance lags. Fears of channel conflict are overblown in a world where many investors split their money between self-directed and advised portfolios. Captive and direct sales of mutual funds are already 15% of the world’s total and will rise.
8. Exiting the exchange
Traditional asset managers pursuing root-and-branch transformation — across products, distribution, technology, and talent — need to reinvest profits, reallocate capital, and revolutionize organizational models, none of which aligns well with mandated quarterly reporting. Alternative asset managers, mostly focused on private markets, now account for 70% of the global sector’s market capitalization, having grown sixfold in value since 2018. Traditional asset managers, excluding the largest, haven’t appreciated at all. Financial sponsors will remain skeptical of the growth case for traditional asset managers and question the lofty multiples for their alternatives-oriented counterparts. Expect several quoted asset managers to leave public markets or seek a degree of insulation by means of creative mergers and acquisitions (M&A), using patient capital from longer-term strategic investors; pursuing combinations with group financial services companies; and/or exploring the possibility of management buyouts.
9. Teaming up to tackle costs
Asset managers are increasingly beholden to technology and service providers that they have outsourced large portions of non-core functions to, as well as specialized vendors providing access to critical data and processing power required to enhance investment processes and distribution effectiveness. Within market data alone, 8% to 15% annualized contracting increases, often labelled as “inflation” and without a cap, have become the norm. To help maintain the balance of power and fight cost pressures, managers will increasingly turn to more strategic arrangements with their partners, including data sharing collaborations with other managers and strategic partnerships with vendors to help build their business in return for preferential terms.
10. Now playing — retirement income solutions, rated “R” for all retirees
While widespread adoption of retirement income solutions has been illusory for years, new developments are bringing this closer to reality. Innovation has exploded, with both traditional and alternative managers, insurers, and recordkeepers/technology providers collaborating to release a stream of new products that promise more income and longevity protection in simpler, “more guaranteed” (although not always cheaper) wrappers. The urgency of income solutions is rising as traditional sources of guaranteed income (government and corporate pensions) are disappearing in conjunction with aging societies. Regulatory reforms and public policy actions are also encouraging adoption. While many solutions will never reach escape velocity, we expect that a few will begin to distinguish themselves with compelling offerings and stake out a claim to becoming the market standard.