The asset management industry is undergoing a structural transformation; growth forecast in emerging markets such as Asia

• The fallout from the financial crisis, regulatory changes and demographic change are forcing the industry to develop new market strategies
• The strongest growth is expected in up-and-coming markets in Asia and the Middle East
• Private and institutional customers are setting ever higher standards for asset managers; tailored solutions are in demand
• Risk management has become more important since the financial crisis and will be a major tool for standing out from competitors
• To stay profitable, providers must focus on core competencies and become more efficient

Asset management is on the verge of structural transformation. As the study "Redefining Asset Management in New Realities" by Roland Berger Strategy Consultants shows, the fallout from the financial crisis, regulatory changes and demographic change will force the industry to realign itself. The Asian market in particular has great potential. The asset pools there grew 7% annually between 2007 and 2010. In general, there are clear trends in international asset management: the only providers that can grow profitably are those that focus on their core competencies, ensure a flexible cost base and align their product offerings to customer needs. In light of the recent upheavals in the capital markets, the role of the risk manager and a focus on core competencies are becoming more important.

"Fiercer competition, customers' stringent requirements, and a shift in the market toward Asia are forcing asset managers to rethink their strategies and business models if they want to grow profitably," explains Olaf Toepfer, Partner at Roland Berger Strategy Consultants.

Focus on emerging markets

Following the first financial crisis in 2008, when investors suffered considerable losses and withdrew massive amounts of funds, worldwide assets under management rose again to USD 76 trillion by 2010. Two thirds of this, over USD 50 trillion, came from institutional investors such as insurance companies and pension funds.

The asset management market developed especially well in emerging markets, particularly Asia, where assets under management grew 7% annually to just under USD 15 trillion today – a trend that is set to continue. Experts predict that in countries such as China, economic growth will lead to annual growth of up to 14% in assets under management between now and 2015. But international business has exacting requirements, warns Toepfer: "Asset management is still first and foremost a local business. Only a few international business models are successful in the long term. But because of the increase in prosperity there, Asia offers significant opportunities for asset managers who can offer a regionally tailored product portfolio. Strategic partnerships with local providers also seem worthwhile."

The Middle East and some African countries, such as Nigeria, also have good growth potential. In these regions, the asset management market has grown by 10% annually over the past few years to just under USD 2 trillion. By contrast, the US market showed a downward trend, shrinking by 1% a year. The German market remains stable – but competition is getting a lot tougher in the industry, warns Frank Heideloff, Partner at Roland Berger: "The times when asset management companies could grow fast and profitably are over. Germany will certainly remain an important market because of the significant volume of assets under management compared to other countries. But here we predict cutthroat competition between local and foreign providers, especially in third-party sales."

Customers' requirements are increasing – Risk management in great demand

To survive the harsh competition, asset managers have to focus more on their clientele's needs: tailored, transparent products are increasingly in demand. "Customers today are much better informed about investment options, act more professionally and are also very aware of risk," says Matthias Hübner, Head of the German Asset Management Practice at Roland Berger. Investors are highly risk-averse, especially since the last credit crunch.

The role of risk managers is thus becoming more important. In the highly competitive market for asset management, they guarantee high security standards for investment products and help build trust between asset managers and customers. "In the industry, this is a very important USP that can create a real competitive edge," says Hübner.

Focusing on core competencies will become more important

The general trend toward greater efficiency and less complexity in the industry is also boosting the trend toward outsourcing. The aim of this is not just to reduce the current cost base but also to make the business model more flexible in order to be prepared for future crises. Asset managers should thus not only focus on lowering bonuses or reducing material costs, but also take a long hard look at their offerings throughout the value chain.

After all, market cycles are shortening and the market will continue to be volatile. "If the storms in the capital markets do not abate, some providers will be in real trouble," warns Matthias Hübner. "If no buyer is found, some asset management companies or their owners will have to deal with entirely new issues, such as an orderly scaling-back of business or even a run-down."

The asset management industry is also characterized by increasing specialization. For example, medium-sized asset management firms will find it hard if they offer hundreds of funds and want to position themselves not only as a provider of traditional investments but also as experts in alternative assets such as private equity, hedge funds, real estate or commodities. "There is a trend toward niche providers in a particular asset area," explains Frank Heideloff. "And in the future, too, providers will focus more on their core competencies and withdraw completely from some asset categories."