The value of total global assets under management grew by 15 per cent in 2019, with institutional investors’ assets reaching $52 trillion, according to a report from the Boston Consulting Group.

The growth was primarily driven by market performance, contributing to about three-quarters of the expansion in 2019. Looking to specific asset classes, alternative products saw 13 per cent growth in AUM, comprising 16 per cent of the total global market and becoming the largest revenue pool across all products. This increase in alternatives is expected to continue, the report said, with alternatives set to represent almost 50 per cent of global revenues by 2024, driven by investor demand for heightened performance, uncorrelated returns, illiquidity premiums and other non-traditional return profiles.

“Yet even when the markets were soaring and asset flows were the highest they had been in a decade, the asset management industry faced a set of structural challenges brought on by fee compression and mounting cost pressures—and the result was a marginal decrease in profitability,” the report said.

Indeed, in 2019 global asset management experienced a small decrease in profitability, with an average operating profit of 34 per cent of net revenues, down from 35 per cent the year before, the report said. And fee pressure persisted through 2019, with revenues as a share of average AUM decreasing to 25.3 basis points from 26.2 in 2018. In terms of basis points, costs were essentially flat, with many asset managers enacting savings measures such as organizational restructuring, staff reductions and rationalization of office locations. “So far, however, these efforts have yielded limited benefits. Costs in absolute terms grew by four per cent in 2019, twice the rate of absolute revenue growth, indicating that cost control measures are not fully counterbalancing the effects of top-line pressures.”

While people costs remain high and are relatively immutable, asset managers sometimes compensate with cutting discretionary spending, such as investments in new technology. However, these short-term cost-control options, have the potential to eliminate the tools an asset manager needs to gain a longer-term strategic advantage, the report said. “Successful players must take a balanced approach toward playing offence versus playing defence,” it noted. “In practice, that means refocusing the company’s product portfolio, making difficult decisions to transform the cost structure where possible, and continuing to invest in innovative technologies that will propel the business forward in the medium to long term.”

Moving forward, new challenges will need to be met with structural changes in three key areas: product innovation, cost structure and growth strategies, the report noted.

“Overall, the market storm of early 2020 has only intensified the industry’s challenges, as asset managers find themselves in uncharted territory,” said Lubasha Heredia, a BCG partner and co-author of the report, in a press release. “After the crash of 2008, the asset management industry benefited from a market rebound that produced the longest bull market in history. In 2020, however, firms must recover flows and profitability through more fundamental changes to their business models. This is both a challenge and an opportunity to accelerate and shape what the future of asset management could look like.”

In seeking to adapt to the current environment, firms will need to change their core business for the near term, the report said, which could include activities like pursuing opportunities in mergers and acquisitions, ramping up digital distribution and accelerating cost-efficiency initiatives, while focusing on innovation over the medium-term.

“We believe that the next wave of competition will be based on creating world-class client experiences that extend beyond performance at a given cost and into a more comprehensive value proposition for the client,” the report said. “Personalized portfolio solutions and tailored client engagement models are typical ways to add such value.”

The report outlined five best practices for leading the way in client experience: leading with data-driven business intelligence, building robust data and technology organizations, realigning sales and marketing, upgrading the product development cycle and strengthening culture and incentives.