But the rate of asset growth fell to 12 percent in 2006, down from 18 percent the previous year and below the average of the past three years of recovery from the plunge of securities market after the dotcom bust. Still, this was enough to lift total assets from €8.9 trillion to just above the €10 trillion level for the first time.
Growth in institutional assets continued to outstrip retail investor growth but, at 14 percent and 8 percent, respectively, both rates were lower than in 2005.
Performance effects once again accounted for two-thirds of the growth in assets under management (AuM), while overall net inflows of 4 percent are at the lowest level seen over the past four years and are on a par with flows in 2004.
Italy, Spain and Portugal actually experienced outflows. AuM growth in the US, by comparison, was higher at 17 percent, and long-term net inflows contributed 4 percent – double the figure of 2005.
The average operating profitability of European asset managers was up, improving from 16.1 basis points (bps) in 2005 to 16.8 bps in 2006 thanks to higher revenue margins offsetting increasing cost margins, McKinsey found.
Total profits rose 20 percent, reaching €16 billion and surpassing even the boom levels of 2000. Profitability in retail business continues to be about four to five times higher than in institutional and improved by 2 bps to 27.3 bps, while institutional profitability increased by a slight 0.4 bps to 5.9 bps.
Net revenue margins in European asset management rose 4 percent from 34.3 bps in 2005 to 35.7 bps in 2006, with revenues in both retail and institutional business increasing. For the retail market, margins were up 7 percent from 50.7 bps in 2005 to 54.5 bps in 2006, driven mainly by lower payments to distribution as open platform distribution continued to gain traction.
After two years of declining relative costs, cost margins rose in 2006, nearly offsetting the previous year’s reduction. From 1999 to 2003, cost margins climbed steadily from 15.4 bps to 20 bps. In the two years that followed, asset managers succeeded in cutting them back, but once again they are marching upwards. They rose 4 percent to 18.9 bps in 2006 despite solid AuM growth.
Says McKinsey: “We should strike one word of caution amid these broadly favourable conditions: the cost developments give cause for concern as rising cost margins and inflexible cost structures could prove harmful during a market downturn.”
Its study finds a “clear polarisation” in growth patterns. The growth winners are Scandinavia, the Netherlands and the UK – what the report describes as the more “sophisticated” markets – while the laggards are Italy, Spain, Portugal, Germany and Switzerland, with growth rates below the European average of 12 percent.
For European asset managers, challenges will include the opening up of distribution, particularly with the rise of guided open architecture, McKinsey declares. At the same time, “the focus is shifting from factory-driven products to customer-centric needs-based solutions”. It forecasts a progressive polarisation of asset managers, resulting in a group of five to ten European mega-players, with strong home markets and significant positions in two or three other markets.
The McKinsey survey is based on data collected from 118 European participants with third-party AuM of some €6.5 trillion, representing around 65 percent of the industry.