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The asset management industry faces dramatic consolidation over the next four years as one in six companies disappear because of a mix of market volatility, high interest rates and pressure on fees.
Sixteen per cent of existing asset and wealth managers will go out of business or be bought up by bigger groups by 2027, according to a PwC survey of 500 asset managers and institutional investors
The global survey also found that almost three-quarters of asset managers are considering acquiring or merging with a competitor as business models come under pressure in a tough market environment.
“The big managers are getting bigger,” said Olwyn Alexander, PwC’s global asset & wealth management leader.
“There’s a lot of cost pressure in the industry now and margin pressure that’s forcing managers to look at their critical mass, and particularly with these pressures from the very big managers in the industry, whether they can withstand that as well as maintain margin.”
The gloomy outlook comes as fund managers reel from their biggest drop in assets in a decade.
The sum managed by asset managers fell 10 per cent between 2021 and 2022 from a high of $127.5tn to $115.1tn as falling markets across asset classes hit management and performance fees, PwC found.
Managers cited inflation, market volatility and interest rates as the driving factors behind the fall, with just under half predicting that their assets under management would be further hit by environmental risks and geopolitics.
The global asset management industry has been rapidly striking deals to respond to these pressures and try to tap new clients or areas of growth, with a number of high profile mergers and acquisitions.
Last month California-based Franklin Templeton agreed to buy rival Putnam Investments for more than $1bn as the asset manager continues its expansion into alternative products and retirement plans.
Toronto-based Brookfield Asset Management, which manages $834bn in assets, predicted in May that the challenging economic environment will force asset managers to consolidate to “up to 10 leading industry players”.
A similar trend is playing out in wealth management. In April wealth manager Rathbones paid £839mn for rival Investec Wealth & Investment, creating a company with more than £100bn in assets under management.
“I think ultimately you will end up with a handful of UK wealth managers that are managing in excess of £100bn,” Chris Woodhouse, the chief executive of wealth manager Evelyn Partners, which has also made acquisitions of smaller advisers this year, told the Financial Times last month.
PwC also forecast that the top 10 traditional asset managers will control half of all assets going into mutual funds by 2027, up from 42.5 per cent in 2020.
In addition, PwC predicts that robo-advice, using algorithms to provide financial services, will grow to manage $6tn by 2027 as it offers low cost, personalised advice. In 2021, JPMorgan bought UK robo-adviser Nutmeg for $700mn.
The survey found that 90 per cent of managers believe that disruptive technologies such as generative AI and the blockchain will boost returns and attract young investors, whose importance is expected to grow further as they inherit $68tn from the previous generation, PwC said.
Fees, which have already fallen by between a fifth and a quarter for active and passive investment funds between 2017 and 2022, are forecast to fall further, to the advantage of bigger players whose scale allows them to absorb lower fees.
“There’s a real race in terms of gathering AUM, and that’s putting significant fresh pressures from a competitive perspective on fees, which many say is to the benefit of the investors,” said PwC’s Alexander.