Tuesday, October 13, 2020 | Stamford, CT USA - The economic consequences of COVID-19 could represent an existential crisis for some asset management firms, forcing managers around the world to make hard strategic choices to protect their businesses.
The COVID-19 crisis is accelerating structural changes that were impacting the asset management industry prior to the pandemic—including greater demand for advice, rising expectations for enhanced digital experiences and a heightened focus on ESG investing. Combined with ongoing margin pressure and fee compression, these intensifying trends could put the businesses of some managers at risk.
“In the post-COVID-19 world, asset managers will have little room for error,” says Andrew McCollum, Head of Investment Management at Greenwich Associates and author of Decision Time for Asset Managers. “They will have to find strategies that defend revenues and margins while also delivering hard-to-find opportunities for growth. In addition, they will have to out-execute rivals in a market that will only get more competitive.”
Strategic Options: Scale or Distinction
Managers competing at scale leverage the benefit of outsized assets under management to address client needs through cost-efficient solutions, allowing them to thrive even in businesses with contracting markets, falling margins and heightened competition. In reality, the option of scale is available only to a relative handful of managers. Fewer than 30 asset managers around the world claim AUM in excess of $1 trillion—a rough threshold for a “scale” manager today.
Most managers will not be able to use economies of scale to escape pressure on their business.
These managers will have to create some other competitive advantage. A strategy of distinction is leveraging the firm’s unique knowledge of a specific area, investor need or business model to create a reason for investors to hire and retain a manager at a profitable fee level. Managers can make themselves distinctive in three main ways: 1) Product specialization in active investments, 2) Client segment specialization, and 3) Approach specialization.
“Even managers that pick the right strategies will struggle if they fail to execute,” says Andrew McCollum. “In the post-COVID marketplace, success will be achieved only by managers who select the proper strategy and then beat the competition through consistent, superior execution.”