Asset managers turning up the heat: Creating differentiated value under uncertainty

Just what is the current temperature of the asset management industry? On a positive note, the bear market has given way to impressive growth, as evidenced by the rocketing growth in global assets under management (AUM) of open-end investment companies, from US$10.9 trillion in 2002 to US$13.4 in 2004. With such a sizeable jump in AUM, expectations of strong financial performance seem reasonable. Instead, many large, global buy-side firms have been dismayed to experience lower revenue and flat income per asset managed.

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The struggle for higher returns stems from persistent inefficiencies, coupled with fee pressures arising from a flight out of traditional, actively managed funds. Further compounding this struggle, analysts are pressuring the industry for double-digit growth over the next five years.

Clearly, buy-side firms need a new approach. Asset managers must be able to respond more effectively to multiple forces shaping the industry. To create value in this uncertain environment, asset managers will have to:

• Seize growth opportunities at the edges—Identify opportunities to gain share at the expanding edges of the buy-side product spectrum, such as hedge funds on one extreme and passive investments on the other
  
  
• Unleash the potential of compliance investments—Use required expenditures to build operational effectiveness and resiliency, and to further strategic goals
  
  
• Recalibrate the business—Rationalize workflows and capabilities and selectively partner to increase efficiency and flexibility
  
  
• Give clients and intermediaries what they need—Develop the ability to seamlessly and profitably meet the needs—not just the "wants"—of both clients and intermediaries.

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