Fee squeeze hurts profits in ‘anaemic’ year for US asset managers

(Financial News) The profits of US asset managers fell 4% last year following a slump in new money won and a crunch in investment fees, according to a report from McKinsey, the consultancy.

Profits dipped amid the continued growth of low-cost passive funds and the persistent underperformance of stock pickers trying to beat the market, with McKinsey describing net flows into the industry last year as “anaemic”. 

In a 33-page study published on Wednesday, the consultancy wrote: “In 2018, some 70% of assets in domestic equities underperformed their passive equivalents on an after-fees basis — adding to the pressures on this already-beleaguered sector and accelerating the shakeout of underperforming active equities managers.”

McKinsey’s report follows the recent publication of figures from the data provider Morningstar, which found that assets in funds tracking broad US equity indices topped those in stock-picking rivals for the first time in August.

McKinsey said: “Passive strategies and ETFs continued to post meaningful gains— inflows of $300bn, equal to 3.3% of beginning-of-year AUM — even in a year of muted flows for the market as a whole.

“ETF adoption continued to expand across both the retail and institutional segments, with meaningful growth in newer areas such as fixed income.”

According to the report, the average assets under management for North American investment companies edged up by almost 7% last year, to $43tn, while average revenues increased by just 1%. In 2017, assets grew 14%.

Pooneh Baghai, a senior partner at the consultancy, said: “North American asset management has entered a period of unprecedented challenges. New opportunities are available, but in order for the industry’s position to stay the same — earning premium growth, profitability and valuation —  everything will need to change.”

Pressure on fees has been a consistent competitive theme over the past few years, McKinsey said, but it reached a record high in 2018, triggering average declines in management fee rates of 6% to 9% over the last five years.

“Industry pricing has been under pressure for some time, but 2018 witnessed the largest aggregate fall in fees in recent years, across market segments and asset classes,” the consultancy said. 


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