Money managers must offer new portfolios and keep cutting costs to survive in an era where frightened investors prefer safer fixed-income funds to stock and hedge funds, a report released Monday showed.
Badly bruised by last year's financial crisis when tumbling markets and investor redemptions shrank global assets 18 per cent to $48.6-trillion, asset managers face more tough times in 2009 and the years ahead, The Boston Consulting Group wrote in its seventh annual asset management industry survey.
Profits will shrivel again, likely falling to 30 per cent or less this year from 34 per cent at the end of 2008 and 38 per cent at the end of 2007, the consultants forecast.
Even though the Dow Jones industrial average just finished its best quarter since the fourth quarter of 2003, BCG consultants warned firms against becoming too confident or thinking the worst is over.
"Asset managers cannot be tricked by green shoots and must make sure they are ready if the crisis gets worse again, where firms see more massive outflows or another drop in the market," Kai Kramer, who heads BCG's global asset management practice, said in a telephone interview.
In what the consultants called an "Armageddon scenario" where the recession deepens and asset prices drop even more, industry assets could decline between 30 per cent and 35 per cent by 2012.
In a "Recovery scenario" where the economy recovers gradually, assets could still drop between 5 per cent and 10 per cent by 2012.
And in a "Happier Day scenario," where the economy rebounds next year, the industry could pull in between 10 per cent and 20 per cent in new assets, the report said.
In any case, fund firms should specialize in certain areas, review how they pay their managers and possibly consider merging with others to gain market share, the survey said. The industry is already seeing mergers such as the sale of BGI to BlackRock by Barclays and the proposed divestiture of Columbia Asset Management by Bank of America .
"Fund firms have to do the things they didn't dare think about," Mr. Kramer said. "You simply can't serve every investor in every way anymore."
Specifically, the survey found that investors who lost billions in retirement savings last year and will soon need to retire on their smaller nest eggs will want safer and cheaper investment options.
Even company and state pension funds will be affected by the shift in the tastes of retirees, the consultants said, forecasting that institutional investors will cut stock allocations to somewhere between 35 per cent and 45 per cent by 2015 from roughly 55 per cent in 2007.
Funds that deliver returns by altering asset allocation instead of trying to pick the best stocks will prosper, while exchange-traded funds and portfolios that follow indexes will be very popular, the survey found.
"People are sick and tired of paying a lot of money for lackluster returns," Mr. Kramer said.
Similarly, the appetite for hedge funds has declined after many of these loosely regulated portfolios failed to return money to investors in a timely way last year. The survey found that hedge fund assets, after shrinking to $1.4-trillion from $1.9-trillion last year, will not top that peak by 2012.