Benchmarking analysis and implications for asset managers
The 2021 Asset Management Study is based on an outside-in competitive profit benchmarking with a special focus on insurance asset managers. Our analysis reveals key traits of insurance asset managers and suggests that for captives, currently only providing asset management services to their parent insurance company, accepting third-party assets offers a promising way to catch up with the market as the resulting revenue more than counterbalances higher cost. We provide suggestions for top-line growth through capabilities, i.e., growing business with existing capabilities in the current market first before expanding geographically and extending capabilities.
Due to ongoing mergers and acquisitions, as well as more dynamically growing markets among others, US asset managers grow significantly faster on average than their European counterparts. Smaller, active asset managers are able to maintain their pole position in profitability because of their business models that are similar to private equity companies.
Our results find that low costs do not necessarily translate into a low cost-income ratio (CIR), because successful asset managers with active investment management models are able to operate profitably with high cost and low CIR. In the past, their dedicated focus on controlling costs led to asset managers being able to slow down the rise in CIR due to falling income. However, further reducing cost is becoming less efficient. Therefore, a greater focus on increasing income is needed going forward.
Many insurers believe in close control of their asset management function and do not consider sourcing that capability. However, the insurance asset manager revenue is significantly lower than market average according to our analysis, and there is high potential for improvement. Additionally, the remaining low-yield environment combined with a low-risk profile places a considerable weight on low risk, fixed yield products in the asset allocation, which reduces the chances of a natural increase in income and profitability. Therefore, a strategic focus on increasing revenue is necessary. Increasing revenue by acquiring third-party asset management business, which also reduces the average cost base per unit of AuM, is therefore an interesting opportunity for captives.
By using a capability lens, revenue growth choices can be prioritized. The primary focus must be to analyze the busines close to the core capabilities.