Global Asset Management 2013

capitalizing on
the Recovery

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Global Asset Management 2013

CAPITALIZING ON
THE RECOVERY

Gary Shub
Brent Beardsley
HLNE DONNADIEU
Kai Kramer
Monish Kumar
Andy Maguire
Philippe Morel
TJUN TANG

July 2013 | The Boston Consulting Group

Contents

INTRODUCTION

A SNAPSHOT OF THE INDUSTRY

Recovery Masks Divergence and Risks to Growth
Emerging Markets Slowly Expand Their Global Share
Investor Appetite Grows for Nontraditional Assets
The Industry Remains Attractive as Profitability Drivers Shift

1 3

THE ASSET MANAGERS QUANDARY

Recurring Revenue Streams Retain Their Profit Power
Specialists and the Ambidextrous Gain the Advantage
U.S. Managers Take the Lead

2 1

HARVESTING REWARDS BY OFFERING SOLUTIONS

Identifying and Tapping the Drivers of Asset Growth
In Retail, an Explosion of Thematic Solutions
Building Capabilities to Surf the Solutions Wave

2 4

FOR FURTHER READING

2 5

NOTE TO THE READER

2 | Capitalizing on the Recovery

Introduction
G

lobal Asset Management 2013: Capitalizing on the Recovery is The

Boston Consulting Groups eleventh annual worldwide study of
the asset management industry. This years research shows that the
global asset-management industry has finally returned to a growth
path, winning a welcome respite after four years of stalled growth.
Both total assets under management (AuM) and profits as a percentage of revenues nearly returned to precrisis levels.
Although these results reflect the beginning of a recovery, the increase in net new assets is relatively modest overall. In addition, managers face market volatility, weakening of some revenue margins, and
wide variations in performance among managers, products, and regions.
The decade since BCGs first annual Global Asset Management report
has seen steady growth in the breadth of our market-sizing research
and benchmarking studies. The goals of the research, however, have
remained steadfast: to probe beneath the surface of the market landscape, identify trends, and provide insights aimed at helping managers build strong and prosperous paths to the future.

Key Market Trends and Recommendations

While traditional actively managed core assets grew in 2012, we believe that this asset class will remain vulnerable to the markets evolution. Managers need a long-term strategy that anticipates those
changes.
This report discusses in particular detail the following trends and strategic recommendations:

The continuing fast growth of solutions and specialties confirms a

structural shift in the market. The advance of these asset classes
will continue to outpace the growthand squeeze the market
shareof traditional actively managed core assets. Traditional
managers hoping to surf these new flows successfully should be
ready to face fundamental decisions about how to participate and
what capabilities to develop.

The most successful managers in every region are either specialists

or traditional providers who have become ambidextrousthat
is, they have maintained their active core-asset businesses while
also developing capabilities to capture new faster-growth assets.
For traditional players, investment in specialties, multiasset skills,
The Boston Consulting Group | 3

or specific services will be a key to participating in the new,

faster-growth flows.

Cost discipline has become an increasingly important focus since

the crisis. Although efficiency gains in basis points from 2007
through 2012 were largely driven by the growth of asset values,
managers are now more actively managing their cost structure.

The operating model is a growing source of strategic advantage.

For many managers, an aggressive operating-model review will be
required to realize their growth ambitions. Operations and IT have
been largely bypassed in asset managers efficiency campaigns,
which usually focus on other corporate and front-office functions.
That is a costly lapse, strategically as well as financially. Reviewing
the operating modelbeyond boosting efficiencyis the key to
flexibility, scalability, and future growth. A review provides managers the blueprint they need to unlock cash and to free management attention for product innovation, entry into new asset
classes, and development of client relationships.

Like its predecessors, this edition of our report reflects a comprehensive market-sizing effort. We covered 42 major country markets (representing more than 98 percent of the global asset-management market), focusing exclusively on assets that are professionally managed
for a fee. We also conducted a detailed analysis of the forces that are
shaping the fortunes of asset management institutions around the
globe.
In addition, this report contains conclusions drawn from a detailed
benchmarking study of more than 120 leading industry competitors
representing 53 percent of global AuMthat BCG conducted early in
2013. Our aim was to collect data on fees, products, distribution channels, and costs in order to gain insights into the current state of the industry and its underlying drivers of profitability.

4 | Capitalizing on the Recovery

A Snapshot of
the Industry

he global asset-management industry

achieved a year of substantial growth,
winning a welcome respite in 2012 after four
years of relative stagnation. Both total assets
under management (AuM) and profits as a
percentage of revenues nearly returned to
precrisis levels.
The global value of AuM rose to a record high
in 2012, surpassing for the first time the precrisis level of global AuM that had been reached
in 2007. AuM increased 9 percent to $62.4 trillion, compared with $57.0 trillion in 2011, and
$57.2 trillion in 2007.1 (See Exhibit 1.)
At the same time, the growth of the industrys
AuM was driven largely by the rise of global
equity and fixed-income marketswhich
pushed up the value of securities underlying
managers assetsrather than by net new asset flows.
Net new assets rose 1.2 percenttheir
strongest growth since the 2008 financial
crisis and a healthier advance than the scant
0.1 percent rise in 2011. Still, the increase was
modest compared with annual advances
ranging from 3 to 6 percent in the years
before the crisis.
Operating marginsor profits as a percentage of net revenuesrose to 37 percent in
2012 from 36 percent in 2011, nearly attaining precrisis levels of 38 percent. Profit in ab-

solute terms was $80 billion, a 7 percent increase from the 2011 level of $74 billion.
However, it remained roughly 15 percent below precrisis highs. The lower absolute profits
were the result of an overall decrease in revenue margins due to a continuing, structural
trend toward lower-margin offerings such as
passive and fixed-income products.
The 2012 results were a positive change from
the year before, when the industrys growth
remained stalled, as we noted in Global Asset
Management 2012: Capturing Growth in Adverse
Times. AuM had essentially flatlined in 2011,
managers failed to attract substantial flows of
net new assets, and operating margins
remained flat.

Recovery Masks Divergence and

Risks to Growth
Yet while 2012 marked a return to growth,
the improved economic fundamentals and
the rise in total AuM masked wide variations
in performance and outlook among regions,
products, and asset managers themselves. In
particular, we observed the following
trendsthe first three of which are mutually
reinforcingthat are redefining the competitive landscape of asset management:

A quarter of managers globally experienced significant erosion of their traditional actively managed core-asset base in
The Boston Consulting Group | 5

Exhibit 1 | Global Assets Under Management Grew to a Record $62.4 Trillion in 2012
Assets under management, 20022012 ($trillions)

16.6

12

12

9.9

10

28.8 27.7 30.3

6.6

3.5

2002 2007 2011 2012

2002 2007 2011 2012

North America

Europe

14

15.9 16.2 17.5

12

24
0.3

2002 2007 2011 2012

0.8

14
1.3

1.5

2002 2007 2011 2012

Global

CAGR, 20022007 (%)

15
0.5

1.1

1.2

2002 2007 2011 2012

Latin America

South Africa and

the Middle East

CAGR, 20072011 (%)

6.3

0.7

17

29

12
1.1

5.9

2002 2007 2011 2012

Japan and Australia

57.2 57.0 62.4

32.6

2.5

3.2

3.8

2002 2007 2011 2012

Asia
(excluding Japan
and Australia)
Annual growth, 20112012 (%)

Source: BCG Global Asset Management Market-Sizing Database, 2013.

Note: Sizing corresponds to assets under management (AuM) sourced from each region and professionally managed in exchange for management
fees; includes captive AuM of insurance groups and pension funds if those AuM are delegated to asset management entities with fees paid; 42
markets covered globally, including offshore AuM. North America = Canada and the U.S.; Europe = Austria, Belgium, the Czech Republic, Denmark,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden,
Switzerland, Turkey, and the U.K.; Asia = China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea, Taiwan, and Thailand; Latin
America = Argentina, Brazil, Chile, and Mexico. For all countries where the currency is not the U.S. dollar, we applied the average 2012 exchange
rate to all years. AuM numbers differ from those in last years report owing mainly to differences in the exchange rates, as well as revisions of
country data. Any apparent discrepancies in growth rates are due to rounding.

2012, despite the broad recovery of AuM.2

Erosion was particularly pronounced in
Europe, where 30 percent of managers
lost 5 percent or more of their active core
assets through net outflows.

Solutions and specialties, such as emerging-market asset classes, continued to

grow faster than traditional active core
assets, a trend favoring managers most
involved in those products.3 We believe
that the higher-speed growth of solutions
and specialty assets, and of passive and
alternative products, represents a structural shift in the market that will continue
to outpace and squeeze the market share
of traditional products.
The most successful managers in every
region now are either specialists or
traditional providers who have become
ambidextrousthat is, they have
maintained their active core-asset businesses while also developing capabilities
to capture new faster-growth assets.

6 | Capitalizing on the Recovery

The winner-take-all phenomenon of recent

yearswith winners taking the lions
share of flowsintensified in the U.S. The
top ten U.S. managers took 65 percent of
all net new fund assets among managers
with positive net flows, compared with 54
percent in 2011. In Europe, the trend
stabilized; the top ten managers took 37
percent of fund asset flows, compared with
44 percent in 2011.

Managers continued to confront a twospeed world in which the smaller, emerging markets grew faster than the developed markets, with higher net flows.4 At
the same time, AuM growth in the developed markets was significantly greater in
absolute terms because of those markets
dominant size.5

Among the developed markets, one set of

countrieswhich includes the U.S.,
Germany, the Netherlands, Australia, and
South Koreashowed solid growth of 10
percent or more that was driven by both

market impact and net flows. In contrast,

Japan and some European countries
including France and Italyregistered
high single-digit growth that was largely
the result of rising markets. This second
set of markets remains under pressure
owing to diminished investor confidence
following the crisis and the impact of
regulatory changes.

Emerging Markets Slowly Expand

Their Global Share
The emerging markets once again grew at a
faster clip than markets in the developed
countries. In 2012, AuM grew 16 percent overall in emerging markets, rising by a compound annual growth rate (CAGR) of 9 percent above its 2007 precrisis level. Emerging
markets overall now represent roughly 8 percent of global AuM, compared with 6 percent
in 2007.
China and Brazil in particular enjoyed robust
growth in 2012, with increases of 23 percent
and 15 percent, respectively. The market recovery and the appreciation of bonds were
strong drivers. Net flows also contributed to
growthon average 5 percent in Asia (excluding Japan and Australia) and 2 percent in
Latin America. That growth allowed those regions to remain significant contributors to
global growth in AuM. From 2009 through
2012, they provided 11 percent and 6 percent
of global growth, respectively.

Asia, excluding Japan and Australia,

represented $3.8 trillion of AuMan
increase of 17 percent in 2012. Both the
retail and institutional segments contributed solid growth: 22 percent and 15
percent, respectively.

Latin America achieved strong growth

of 14 percent in 2012, bringing AuM to
$1.5 trillion. The retail segment grew more
robustly than the institutional market.

In the Middle East and South Africa, AuM

grew by 12 percent in 2012.

In the developed markets, which represent roughly 90 percent of global AuM,

managed assets grew 9 percent in 2012.

On average, developed markets have

grown at a CAGR of 1 percent since 2007.

North America finally managed to surpass its 2007 peak AuM level, reaching
$30.3 trillion in 2012, an increase of 9
percent from 2011. Growth was driven by
both market impact and net flows of
roughly 2 percent.

North America finally managed to surpass its 2007

peak AuM level.

Overall, European AuM increased 8

percent to $17.5 trillion in 2012, with no
net contribution of new flows. France and
Southern Europeincluding Italy, Spain,
Portugal, and Greeceshrank 7 percent
and experienced net outflows while
northern Europe, including Germany, the
Netherlands, and the Nordic countries,
grew 11 percent. AuM in the U.K. increased just 6 percentowing to the
lower appreciation of equity and bond
values and despite relatively strong
positive net flows of 2 percentthe best
performance in Europe. France, Germany,
Italy, Switzerland, and Spain registered
net outflows.

Japan and Australia together accounted

for 10 percent of global AuM at the end of
2012, growing by 6 percent and 14 percent, respectively.

Investor Appetite Grows for

Nontraditional Assets
Persistently lower interest rates and shifting
investor preferences expanded the already
growing appetite for specialties, solutions,
and passive products. (See Exhibit 2.) Investors continued to divest developed-market
equities and money market assets, while net
flows into passive strategies, fixed-income
specialties, and high-yield and emerging-market corporate debt were strong. Net flows into
traditional developed-market government
debt stabilized.
The Boston Consulting Group | 7

Exhibit 2 | Investors Continued Their Shift from Traditional Actively Managed Core Assets to
Specialties and Passives
2012 net inflows, by product strategy, relative to 2011 AuM (%)
14

15
10

0
1

1
5
10

13

5
All
products

Developedmarket
large-cap
equities

Equities

Global- and
emergingmarket
equities

DevelopedPassive
market small- and equities
mid-cap equities and
specialties

Passive
Multiasset
Global- and
fixed
funds
emergingincome
market
corporate
debt
DevelopedGlobal- and
High-yield
Money
market
emergingdebt
market
government
market
debt
government debt

Fixed
income

Developedmarket
corporate
debt

Source: BCG Global Asset Management Benchmarking Database, 2013.

The demand for specialties and solutions in

2012 was also evident in the ranking of
mutual-fund product strategies that received
the highest net flows. In both the U.S. and
Europe, the top ten strategies included target
date funds, emerging-market equities,
emerging-market bonds, high-yield bonds,
and global fundssuch as global allocation
in the U.S. and global bonds and global
equities in Europe. (See Exhibit 3.)
The shift in investor preferences helped intensify the winner-take-all trend in the industry again in 2012, particularly in the U.S. The
top ten U.S. and European players captured
94 percent and 51 percent, respectively, of all
net new fund asset flows, similar to their
dominance in recent years. This was driven
partly by the higher concentration of those
leading players in specialties and passive
products than in the slower-growing traditional products. (See Exhibit 4.)
Intense competition has driven the winnertake-all trend down to the product level, particularly in the U.S. and in specialties markets. (See Exhibit 5.)
In the U.S., 73 percent of AuM of active core
strategy mutual funds is in the hands of the
top ten equity-specialty managers, compared
8 | Capitalizing on the Recovery

with 65 percent of AuM for equity core

strategies. That ratio reaches 76 percent for
fixed-income specialties, 72 percent for core
fixed-income products, 72 percent for other
specialties, and 44 percent for other core
products.
In Europe, the contrast in control of
specialties and core products is even stronger,
even if overall concentration is not as high as
in the U.S. In equities, 29 percent of core
products are in the hands of the top ten
providers, compared with 49 percent for
specialties. In fixed income, 31 percent of
core strategies are held by top-ten providers,
compared with 56 percent for fixed-income
specialties. Other products are divided 35
percent and 53 percent, respectively, between
other core and other specialties providers.
In this competitive environment, many traditional asset managers have little choice but to
try to identify specific areas in which they
can build more relevant capabilities.
The threat looms particularly large for
managers in continental Europe and AsiaPacific. There, due to the smaller presence of
pension funds and endowment businesses,
specialties did not develop as much as in the
U.S. or U.K. markets: they werent as relevant

Exhibit 3 | In Every Region, Most of the Top Ten Strategies Were Specialties or Solutions
United States

Europe

Asia-Pacific

Top ten strategies, by

2012 net sales1 ($billions)

Top ten strategies, by

2012 net sales2 ($billions)

Top ten strategies, by

2012 net sales3 ($billions)

Intermediateterm bonds

130

High-yield bonds

Target date

51

Emergingmarket bonds

Diversified
emerging markets

47

Global bonds

Short-term bonds

37

Large blend

32

61

Flexible
multisector bonds
Europe EUR
bonds

Money market
22

Emergingmarket bonds

39

18

China equities

15

Asia-Pacific bonds;
local currencies

10

25

Real estate

10

29

Emerging-market
bonds

27

Global equities

25

Japanese equities

World allocation

23

24

India INR bonds

Multisector bonds

23

23

Global bonds

Conservative
allocation

23

USD money
markets
Absolute return,
multiasset
Emergingmarket equities

22

North American
equities

Global, emerging markets, or specialty

93

China RMB bonds

44

USD bonds

41

High-yield bonds

73

6
4
3
2

Solution

Sources: Strategic Insight; BCG analysis.

1
Based on mutual funds and exchange-traded funds, excluding, for instance, assets of mandates.
2
Out of 28 strategies defined by Strategic Insight.
3
Out of 27 strategies defined by Strategic Insight.

Exhibit 4 | The Winner-Take-All Trend Favored Large Passive and Specialty FirmsWinners
Changed Little in 2012
United States

Asset
manager

Cumulative
MutualCumulative
share of net
fund net share of total flows of players
flows, 2012 market net
with positive
($billions)
flows (%)
net flows (%)

Europe

Cumulative
MutualCumulative
share of net
fund net share of total flows of players
flows, 2012 market net
with positive
($billions)
flows (%)
net flows (%)

Asset
manager

Vanguard

139

35

24

PIMCO

44

13

PIMCO

65

51

35

BlackRock

29

21

15

BlackRock

57

65

45

AllianceBernstein

20

27

20

JPMorgan Chase & Co. 25

72

49

Nordea

16

32

23

DoubleLine Capital

22

77

53

M&G Investments

13

36

26

T. Rowe Price

15

81

56

AXA

13

40

29

MFS Investment
Management

14

85

58

BNY Mellon

11

43

31

Dimensional
Fund Advisors
State Street
Global Advisors

14

88

61

Standard Lif e

11

46

33

13

91

63

Aberdeen

49

35

Lord Abbett

12

94

65

JPMorgan Chase & Co. 9

51

37

Total market

401

Total market

Xx = New player in top-ten ranking, 2012 (compared with 2011 rankings)

339

Five U.S. players were in Europes top ten,

compared with three of ten in 2009

Sources: Strategic Insight; BCG analysis.

Note: This analysis is based on mutual funds and EFTs, excluding money market funds.

The Boston Consulting Group | 9

Exhibit 5 | Competition Has Driven the Winner-Take-All Trend Down to the Product Level in the
U.S. and Specialty Markets
U.S. fund providers AuM concentration,
by product type (%)
41

Equity core

European fund providers AuM concentration,

by product type (%)

65

Equity core

Large growth
Large value
Large blend

12 29

Equity Europe
Equity specialties
47

Equity specialties

73

Foreign large blend

World stock
Diversified emerging markets
Mid-cap growth
Foreign large growth
Small growth
Foreign large value
Small blend
Mid-cap value
Mid-cap blend
Sector equity
Small value

25

49

Global equities
Asia-Pacific equities
Emerging-market equities
North American equities
Other equity sector
Real estate equities
European passive equities
Passive equity specialties
Fixed-income core

13 31

European bonds
Fixed-income specialties
48

Fixed-income core

72

Intermediate term
Municipal
Short term
Intermediate government
Inflation protected

34

56

Global bonds
High-yield bonds
Emerging-market bonds
U.S. bonds
Convertible bonds
Asia-Pacific bonds

Fixed-income specialties
High-yield bonds
Multisector bonds
World bonds
Bank loans
Emerging-market bonds
High-yield municipals
Nontraditional bonds

47

Other core

27 44

76

Other bonds
European passive bonds
Specialty passive bonds
Other core

17 35

Mixed balanced
Mixed conservative
Mixed aggressive
Other specialties

Balanced

29

53

Target maturity
50

Other specialties
Target date
World allocation
Real estate
Mixed flexible
Commodities

72

Alternative
Real estate
Mixed flexible
Commodities
Absolute return
Other passive

0 20 40 60 80 100
Managers ranked one through three

0 20 40 60 80 100

Managers ranked four through ten

Sources: Strategic Insight; BCG analysis.

Note: Based on mutual-fund data; money market, guaranteed and protected, and smaller than $50 billion categories in the U.S. are not included;
Europe includes offshore markets.

10 | Capitalizing on the Recovery

to mass-retail investors or insurance companies

and other institutions with restrictive
investment guidelines. This gap set the stage
for U.S. and U.K. managers to expand
successfully, investing beyond their home
markets in continental Europe and Asia-Pacific.
For traditional players, investment in multiasset-class skills and specific services is the key
to participating in the continued growth of solutions in both the retail and the institutional
segments. Already, a small set of pioneering
managers have stepped into the solutions vanguard to capture and dominate the markets
strongest flow of new assets, and their revenues are expected to rise at 2.5 times the rate
of those of actively managed core assets, as we
discuss in this reports concluding chapter,
Harvesting Rewards by Offering Solutions.
We believe that passive, alternative, and
specialty products such as emerging-market

asset classes and solutions will continue to

grow. That will further shrink and squeeze
the traditional-product share, which now
represents 50 percent of total AuM and 33
percent of global revenues.
We estimate that by 2016, traditional
products will represent 44 percent of AuM
and 30 percent of revenues. (See Exhibit 6.)

The Industry Remains Attractive

as Profitability Drivers Shift
Asset management profitability improved
significantly in 2012, nearly rebounding to
pre-2008 levels. In absolute terms, profits
climbed 7 percent, rising to $80 billion
15 percent less than the historical peak of
$94 billion in 2007.
The 2012 increase was driven by 5 percent
growth in average AuM. Net revenues

Exhibit 6 | Traditional Active Core Assets and Managers Will Continue to Be Squeezed by New
Faster-Growing Assets
CAGR, 20122016 (%)

25

Passive products/ETFs
20

Fixed-income
ETFs

Passive
equity

10
5 LDIs

Fixedincome
specialties5 Equity
core2

Money market
0

Solutions6

Real
Balanced estate

Fixedincome
core3

Alternative products

Passive fixed Equity ETFs

income

15

Infrastructure

Equity
specialties4

Hedge funds
Private equity

Commodities

Funds of
private-equity
funds
Funds of
hedge funds

Structured
Traditional actively
managed products
50

Estimated size, 2012 ($trillions); scale = $1 trillion

100
Active

200

Net revenue margin1 (basis points)

Passive

Alternative

Sources: BCG Global Asset Management Market-Sizing Database, 2013; BCG Global Asset Management Benchmarking Database, 2013; ICI;
Preqin; HFR; Strategic Insight; BlackRock ETP report; IMA; OECD; Towers Watson; P&I; Lippers/Reuters; BCG analysis.
Note: ETFs = exchange-traded funds; LDIs = liability-driven investments.
1
Management fees net of distribution costs.
2
Includes actively managed domestic large-cap equity.
3
Includes actively managed domestic government debt.
4
Includes foreign, global, emerging-market equities, small and mid caps, and sectors.
5
Includes credit, emerging-market and global debt, high-yield bonds, and convertibles.
6
Includes absolute return, target date, global asset-allocation, flexible, income, and volatility funds.

The Boston Consulting Group | 11

improved by 4 percent, and costs increased

by 3 percent. As a result, operating margins
rose to 37 percent of net revenues. (See
Exhibit 7.)

in the next chapter of this report, is that U.S.

managers are now more adept than their
European counterparts at developing
specialist capabilities that allow them to
expand both domestically and internationally, especially in Europe.

In the years since the crisis, managers have

changed the way that they achieve profit improvement. Before 2008, AuM growth and
high margins were the unique drivers of profitability. Nowadays, in a context of overall flat
revenue margins, cost discipline has become
a top-of-the-agenda concern of CEOs as well.
And even if the decline of costs, in basis
points, was largely driven by asset growth
from 2007 through 2012, costs in 2012 in absolute terms were also 5 percent below the
2007 level in 2012. During 2012, despite the
AuM recovery and the fact that two-thirds
of players managed to increase their profitability, only 33 percent of asset managers
did reduce their costs, including 13 percent
who managed to increase revenues at the
same time.

Notes
1. Asset values for all currencies in all years are based
on 2012 average U.S. dollar exchange rates to prevent
currency swing distortions. The figures here do not
directly correspond with those in our past annual
reports owing to currency rate adjustments, as well as to
updated historical source data and methodology
changes.
2. Active core assets include traditional strategies such
as active domestic large-cap equities, active domestic
government debt, and active balanced and active
structured products.
3. Specialties comprise equity specialtiesamong them
foreign, global, emerging markets, small caps, mid caps,
and sectorsas well as fixed-income specialties,
including credit, emerging markets, global, high yield,
and convertibles.
4. Emerging markets include Argentina, Brazil, Chile,
China, the Czech Republic, Hungary, India, Indonesia,
Malaysia, Mexico, the Middle East, Morocco, Poland,
Russia, South Africa, Thailand, and Turkey.
5. Developed markets include Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany,
Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg,
the Netherlands, Norway, Portugal, Singapore, South
Korea, Spain, Sweden, Switzerland, Taiwan, the U.K.,
and the U.S.

Overall, there was no profit improvement for

European players. Despite strong market
growth, there was increased competition from
U.S. managers. The profit pool of European
managers in 2012 remained 31 percent below
precrisis levels, while the pool for U.S. players
averaged 10 percent above those levels. A key
reason for this disparity, as discussed in detail

Exhibit 7 | Profitability Has Returned to Precrisis Levels, but Net Revenues Remain Flat
Net revenues1 (basis points)
40 29.4 30.9 31.8 34.3 35.3 29.3
28.2 29.8 29.7 29.3

Operating margins (% of net revenues)

38

40

20
0

38

34
30

27

38
35

34

36

37

29

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
20
Costs (basis points)

40
20
0

21.4 20.3 19.7 21.2 21.8 19.3 19.9 19.4 19.0 18.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

While costs now get more manager attention, cost declines

have largely been driven by the growth of asset values
Source: BCG Global Asset Management Benchmarking Database, 2013.
1
Management fees net of distribution costs.

12 | Capitalizing on the Recovery

THE ASSET MANAGERS

QUANDARY

odays asset managers face a quandary:

Should they remain rooted in their traditional, still profitable business of actively
managing investors core assets and ignore the
lure of fresh opportunities? Or should they follow the money, explore new revenue sources,
and divert attention and resources to fastergrowing but less predictable noncore products
such as passives, solutions, and specialties?
Paradoxically, that dilemma deepened in 2012,
as recovering economies and rising markets
offered the first year of substantial growth in
actively managed core assets since the financial crisis of 2008. The reinvigorated growth
strengthened the enduring perception of the
value of active core assets, which composed 50
percent of global AuM in 2012. (See Exhibit 8.)
Although active core AuM continues its slow
decline as a share of overall AuM, it has
grown in absolute terms by $2.8 trillion since
2008 and by $6.1 trillion since 2003. In fact,
for 57 percent of the top 100 fund providers
in the U.S. and the top 100in Europe, active
core assets still constitute at least 50 percent
of AuM. Just 19 percent of managers have less
than 25 percent of active core AuM.

Recurring Revenue Streams

Retain Their Profit Power
Recurring revenue streamsfrom a managers existing assetsare largely derived from

active core assets and continue to provide

most of the industrys revenues and profits.
In 2012, recurring revenues totaled $170 billionabout 80 percent of the global industrys total $215 billion revenue pool. Through
market appreciation alone, active core revenues are expected to increase from $68 billion in 2012 to $79 billion in 2016, as overall
industry revenues rise from $215 billion to
$279 billion. (See Exhibit 9.)

Traditional managers
recurring revenues mask
any urgency to chase new,
faster-growing flows.
The dominant share of active core assets in
the overall asset pool continues to generate
the industrys largest single revenue stream
today. This stream will remain significant despite those assets continued slow retreat as a
share of the overall poolat least for managers that successfully shield their active coreasset business from erosion. Managers facing
rapid erosion must quickly move to stabilize
their asset base, as we discuss below.
For most traditional managers, this seemingly
guaranteed stream of recurring revenues
masks any urgency to confront the hurdles
The Boston Consulting Group | 13

Exhibit 8 | Active Core Assets Continue to Lose Share but Still Represent
50 Percent of AuM
Global AuM, by product
$37.5 trillion
Alternatives1

5%, $1.9 trillion

Active specialties2

22%, $8.2 trillion

Solutions and LDIs3

$62.4 trillion

$47.3 trillion
16

8%, $3.9 trillion

23%, $10.8 trillion

15

11

10%, $6.0 trillion

24%, $15.1 trillion

3%, $1.3 trillion

18

59%, $28.1 trillion

50%, $30.9 trillion

25

13%, $7.9 trillion

2%,
$0.6 trillion

Active core4

Passive/ETFs

66%, $24.8 trillion

5%, $2.0 trillion

10

2003

7%, $3.3 trillion

2008

4%, $2.5 trillion

2012

CAGR (%)
Sources: BCG Global Asset Management Market-Sizing Database, 2013; BCG Global Asset Management Benchmarking
Database, 2013; ICI; Preqin; HFR; Strategic Insight; BlackRock ETP report; IMA; OECD; Towers Watson; P&I; Lippers/
Reuters; BCG analysis.
Note: ETFs = exchange-traded funds; LDIs = liability-driven investments. Any apparent discrepancies in totals are due to
rounding.
1
Includes hedge, private-equity, real estate, infrastructure, and commodity funds.
2
Includes equity specialties (foreign, global, emerging markets, small and mid caps, and sector) and fixed-income
specialties (credit, emerging markets, global, high yield, and convertibles).
3
Includes absolute-return, target date, global asset-allocation, flexible, income, and volatility funds, and LDIs.
4
Includes active domestic large-cap equity, active government fixed-income, money market, and traditional balanced and
structured products.

involved in chasing new, faster-growing flows.

Chief among these challenges are the
difficulties traditional managers face in
achieving recognition as credible providers of
new products and strategies. Designing and
fielding a credible suite of new offerings can
be challenging. Managers face an ongoing
inherent risk: their leadership teams are
unfamiliar with the new terrain where the
winners are investing in innovative pipelines
and strong capabilities.
To compete, traditional managers must learn
to differentiate their offerings, strengthen
distribution, and make big bets on new
strategies, markets, channels, and capabilities.
All this requires strong focus and investment
in innovationwhich carries risks and, in
many cases, requires cultural change. Their
record of success to date has been limited.
14 | Capitalizing on the Recovery

Furthermore, chasing new asset flows may be

rewarded only gradually. Although the AuM
of high-growth products has advanced quickly, the increases have been built on relatively
small bases. Since 2008, the CAGR of AuM for
solutions has increased 18 percent; for passives, 25 percent; for alternatives, 11 percent;
and for active specialties, 9 percent. Combined, however, these high-growth but small
products have reduced the active core-asset
share of global AuM by just 9 percentage
points, from 59 percent to 50 percent.
Finally, most managers do not experience declining revenues or profits from their active
core assets in absolute terms. In fact, both will
likely continue to rise at low single-digit rates.
Given the limited threat to recurring revenues and profits, why cant managers just sit

Exhibit 9 | Active Core Revenues, While Slow-Growing, Are Forecast to Rise to

$79 Billion in 2016 from $68 Billion in 2012
Global asset-management net-revenue pool
Estimated revenue CAGR,
20122016 (%)

Industry revenues ($billions)

300

279
12
14

+7

215

8
89

80

68

79

2012

2016, projected

200

13
14
1

66

100

60

0
Solutions
Passive

Money market
Alternatives

Active specialties
Active core

Sources: BCG Global Asset Management Market-Sizing Database, 2013; BCG Global Asset Management Benchmarking
Database, 2013; ICI; Preqin; HFR; Strategic Insight; BlackRock ETP report; IMA; OECD; Towers Watson; P&I; Lippers/
Reuters; BCG analysis.
Note: Solutions include target date, absolute-return, income, flexible, world allocation, and volatility funds, as well as
liability-driven investments; passive includes exchange-traded and passive funds and mandates; alternatives include
hedge and private-equity funds, real estate, infrastructure, and commodities; active core includes active core equity (local
large-cap equity), active core fixed-income (developed-market government debt), traditional balanced funds, and structured
products; active specialties include other active equity and fixed-income products. Any apparent discrepancies in totals are
due to rounding.

back, relax, and not worry about asset

growth?
The answer is that traditional actively managed core assetswhether they rebound for a
single year or prosper for a decaderemain
vulnerable to the markets continuing evolution. All managers need a long-term strategy
to deal with those changes into the future, as
discussed below.
Some managers are more vulnerable and
need a plan for immediate action. The
situation is most urgent for a subset of these
managers: those with little choice because of
rapid asset erosion.
Although most managers dont face rapid erosion of their active core assets, about 25 percent of managers are experiencing 5 percent

or greater outflows from their active coreasset base. In the face of declining revenues
and profits, these managers must invest in
the development of new capabilities. And
they must act quickly before time runs out.
As an immediate step, they should consider a
thorough review to identify and eliminate
any operating inefficiencies in order to free
up cash and refocus management attention
on product innovation, entry into new asset
classes, and development of client relationships. (See the sidebar Efficiencys Next
Frontier: The Target Operating Model.)

Specialists and the Ambidextrous

Gain the Advantage
Another set of managers have already chosen
to invest the cash and profits generated by
their active core-asset base to build new capaThe Boston Consulting Group | 15

Efficiencys Next Frontier

The Target Operating Model

For the leadership teams of most asset

managers, improving efficiencies has been
a top-of-mind goal for a number of years.
And they have the scars to prove it. Given
the long succession of campaigns many
managers have already pursued, the
prospect of making additional big leaps in
efficiency might seem far-fetched.
The reality can, however, be different when
it comes to operations and IT, where
efficiency improvement efforts generally
werent pursued with the same gusto as
elsewhere in the organization. Indeed,
while asset managers operations and IT
costs remained unchanged from 2009
through 2012, managers reduced frontoffice costs by an average 0.9 basis
points and head-office costs by 0.7 basis
points.
Asset managers pay a price for this uneven
focus on productivity. But the real loss goes
much deeper than higher costs and
reduced efficiencies in operations and IT.
By failing to establish a target operating
model, managers undermine a substantial
set of opportunities to improve competitivenessfor example, by moving into new
and faster-growing asset classes such as
solutions and specialties.
Furthermore, inattention to chronic inefficiencies in operations and IT, in addition to
having a direct business impact, risks
failure to meet the increasingly high bar set
by consultants and institutional investors
in todays tough business environment.
The result can be a critical setback at the
crucial moment when a manager needs to
expand into a larger space, is ready to
introduce innovative new products, or has
an opportunity to trade new asset classes.
Truly deep operational and IT efficiencies
are requirements for supporting the
carefully laid groundwork necessary to
scale operations as an organization grows.

16 | Capitalizing on the Recovery

Efficiency isnt just about belt-tightening. It

requires fundamental changes to the
model, which involve reviewing end-to-end
processes, sourcing models, shared-service
structures, and the global footprint. In fact,
true efficiency requires an examination of
the managers entire organization and the
very backbone of its structure. Scrutiny this
deep may be frightening at first, but
managers can remain focused and productive if they start with clear agreement and
a disciplined understanding of key objectives and deliverables.

Efficiency isnt just about

belt-tightening. It requires
fundamental changes to
the model.
The potential opportunity is a material one.
On the cost side, savings can reach 20 to 35
percent or more, depending on the breadth
and depth of approach. And, in addition to
cost savings, operating-model transformation can help deliver operational excellence, including improved client service
and satisfaction, shorter response times,
lower error rates, and quantified and
reduced risk, as well as critical areas that
are identified and monitored and resources
that are appropriately and strategically
deployed.
When it comes to designing a target
operating model, one size does not fit all.
The appropriate operating model depends
on the business model, and it requires
making early choices related to key
dimensions such as customer experience,
flexibility, operating risk, and cost. Location
and product mix are among the primary
drivers of model variance.
Asset managers, depending on their
specific business model, spend as much as

one-third of their total costs on operations

and IT alone. The target operating-model
opportunity appears particularly compelling for traditional managers and for ambidextrous managers. They spend 28
percent and 29 percent, respectively, of
their total costs on operations and IT,
compared with 22 percent for specialists.
Passive managers also can be rewarded
with efficiency gains. They spend nearly
one-third of total costs on those two
functions, owing to the higher IT investments required by their business model.
(See the exhibit below.)
For ambidextrous players, higher costs can
be a result of the increased complexity
involved in offering both traditional and
more sophisticated financial products or of
focusing on growth and development at the
expense of organizational efficiency. A

review of the operating model can, of

course, stimulate investment by lowering
costs and freeing up cash. But there are
other crucial benefits, including the ability
to scale operations as the organization
grows.
For traditional managers, the high cost of
operations and IT can preempt investments in front-office capabilities, undermining strategic opportunities. Front-office
expenses average only 8 basis points for
traditional managers, compared with 11
basis points for ambidextrous players and
16 basis points for specialists.
An operating-model review offers a powerful way for traditional players either to
rekindle profitable growth or to make the
strategic front-office investments required
to build new product capabilities.

As Much as 31 Percent of Asset Managers Total Costs Are Dedicated to

Operations and IT
Costs by function (basis points)
Business
management and
support functions

Passive

Operations and IT

1.9

3.0

20%

31%

3.2

4.3

21%

28%

Front oce1

Total
(basis points)

4.7
49%

9.6

7.8
Traditional

51%

15.3

10.9
Ambidextrous
(Traditional
and specialists)

4.3
20%

6.1
29%

51%
21.4
15.8

Specialists

5.3

5.8

20%

22%

59%
27.0

Source: BCG Global Asset Management Benchmarking Database, 2013.

Note: Any apparent discrepancies in totals are due to rounding.
1
Includes sales, distribution, client service, product specialists, investment management, and trade execution.

The Boston Consulting Group | 17

bilities and participate in asset growth.These

playersand there are only a few of them
have found a way to win. They, and the specialist managers, are capturing most of the
net flows into the market.

Specialists and ambidextrous

managers will continue to
wield significant advantage.
The most successful of these managers, as
noted earlier, are either specialists or
traditional players who have become
ambidextrous by continuing to build and
maintain the margins of their traditional
active assets while capturing new asset
flows in fast-growing products. Over the past
two years, ambidextrous and specialist
managers have been the most successful
players, generating high fees and margins.
Their profits have grown at a CAGR of 10
percent, while the profits of traditional
managers declined at a CAGR of 2 percent.
(See Exhibit 10.)

The specialists and ambidextrous managers

will continue to wield significant advantage
in the short to medium term. The remaining
playersa large group, experiencing little
asset erosion and strong cash flowsshould
nonetheless remain alert. They must identify
the key capabilities required to extend the
retention of their active core-asset base: the
specific products and services that will be
required by their investors and the solutions
that they are positioned to provide.
These remaining managers should take
advantage of their relatively privileged
situation to invest in improving efficiency
and enhancing the profitability of their active
core-asset business. This would allow them
not only to expand profitability of this
business but also to fund innovation and to
build capabilities that will support new
growth in the future.
The cost of staying focused only on active core
assets is potentially twofold. First, given unpredictable future product shifts, there is a medium-term asset-retention risk. Second, there is
the impact of low growth on the managers
ability to attract strong talent and maintain

Exhibit 10 | Specialists and Ambidextrous Managers Fared Better Than

Traditional Players
Key ratios

Passive

Traditional

Ambidextrous
(traditional
and specialists)3

Specialists4

Net revenues
(basis points)

15

24

37

46

Profits
(basis points)

15

20

Profitability
(% of revenues)

35

36

41

42

AuM CAGR,
20102012 (%)

Revenue CAGR,
20102012 (%)

Profit CAGR,
20102012 (%)

10

10

Product innovation and expertise are drivers of success

Source: BCG Global Asset Management Benchmarking Database, 2013.
1
Passive players include asset managers with more than 40 percent passive assets. Profits as a percentage of net revenues
do not reconcile with revenues and profits in basis points because not all players report profitability in the same way,
making comparisons meaningless.
2
Traditional players include asset managers with more than 70 percent of assets from developed-market large-cap equities,
developed-market government debt, money markets, structured products, and balanced funds.
3
Ambidextrous managers are traditional and specialist players with more than 30 percent traditional assets and more than
20 percent specialties.
4
Specialists include players with more than 50 percent equity and fixed-income specialties and alternative assets but
exclude alternative players and players with mostly captive assets.

18 | Capitalizing on the Recovery

high levels of employee engagement. This

could jeopardize the businesss performance
and strength now and in the future.
Simply clinging to traditional business and
avoiding the risk and discomfort of change
means that these active core-asset stalwarts
will be competing for just $11 billion of an estimated $64 billion increase in total revenues
from 2012 through 2016.

U.S. Managers Take the Lead

Among the specialist and ambidextrous
players, U.S. managers have shown the most
leadership and have won the rewards. They
have become more adept than their European counterparts in taking bites from both
sides of the apple: retaining active core assets
at home and using their specialty capabilities
to develop internationally, especially in
Europe.
Active core assets at home provide a familiar,
low-risk, high-return terrain that offsets any
wariness about placing bets on new strategies,
markets, and channels or gambling on the investments required to build fresh capabilities.

As a result, although U.S. domestic assets

have grown only 5 percent since 2007, U.S.
managers average AuM grew by 11 percent,
and their profit pool grew 10 percent above
its 2007 precrisis level. (See Exhibit 11.)

U.S. managers profit pool

grew 10 percent above its
precrisis level; the Europeans
remains 31 percent below.
By contrast, and despite the recovery of AuM
since the crisis, the profit pool for European
managers remains 31 percent below precrisis
levels. (See Exhibit 12.) Meanwhile, some U.S.
managers have been more successful in pursuing specialties, taking advantage of the
more pronounced erosion of the active coreasset base in Europe while defending the revenues and profits from their traditional and
specialty assets at home.
This ambidexterity has helped those U.S.
managers make substantial gains in capturing

Exhibit 11 | U.S. Managers Profit Pool Surpassed Precrisis Levels

Evolution of key economics for U.S. players

U.S. market AuM

end-of-year
evolution
($trillions)

30

+5%

28.3
27.1 25.9
25.8
24.0
21.3

20

Average AuM
Index

Net revenues1
Index

+11%
120
100

100
97

98

111
105

87

80

100
80

Costs
Index

2%

100
87
78

93

98

70

100
80

60

60

40

40

20

20

Profit pool

100
83

79

86

92 94

40
20

0
2007 2009 2011
2008 2010 2012

0
2007 2009 2011
2008 2010 2012

0
2007 2009 2011
2008 2010 2012

110
100
80
60

60
10

+10%

Index

6%

100

94

98

69
52

40
20

0
2007 2009 2011
2008 2010 2012

0
2007 2009 2011
2008 2010 2012

Revenues are slightly lower than the 2007 level, costs are 6 percent lower
than in 2007, and AuM is up on non-U.S. expansion
Sources: BCG Global Asset Management Market-Sizing Database, 2013; BCG Global Asset Management Benchmarking Database, 2013.
Note: Evolution for end-of-year AuM is based on market-sizing analysis, evolution of average AuM, net revenues, costs, and profits from our
benchmarking sample. Values with fixed exchange rates use the average 2012 rate.
1
Management fees net of distribution costs.

The Boston Consulting Group | 19

Exhibit 12 | European Managers Profit Pool Remains More Than 30 Percent Below Precrisis
Levels
Evolution of key economics for European players

European market
AuM end-of-year
evolution
($trillions)

20

15

Average AuM
+4%

Index

+10%

16.2 17.5
15.9
16.2
15.1
13.8

120
100

100
95

99

16%

Index

104
101

90

80

100

Costs

100

Index

100

5%
86 84

83 83 84

80

100

95 94 95

Profit pool

100

80

80

60

60

60

40

40

40

20

20

20

80

70

40
5
20
2007 2009 2011
2008 2010 2012

2007 2009 2011

2008 2010 2012

2007 2009 2011

2008 2010 2012

2007 2009 2011

2008 2010 2012

31%

Index

60

10

Net revenues1

100

72

67 69 69
53

2007 2009 2011

2008 2010 2012

Revenues are 16 percent below the 2007 level,

but costs are only 5 percent lower
Sources: BCG Global Asset Management Market-Sizing Database, 2013; BCG Global Asset Management Benchmarking Database, 2013.
Note: Evolution for end-of-year AuM is based on market-sizing analysis, evolution of average AuM, net revenues, costs, and profits from our
benchmarking sample. Values with fixed exchange rates use the average 2012 rate.
1
Management fees net of distribution costs.

new asset flows in Europe. In 2009, only three

U.S. managers were among the top ten recipients of new asset flows of mutual funds in
Europe. In 2012, as in 2011, there were five:
PIMCO, BlackRock, AllianceBernstein, BNY
Mellon, and JPMorgan Chase, as illustrated in
Exhibit 4.
In order to truly confront their quandary, asset managers must reassess their operating

20 | Capitalizing on the Recovery

models to identify opportunities for improving the efficiency and profitability of their
current business and conduct an honest assessment of their strengths to identify how to
invest in innovation and capability building
where they have a right to win. That will position them to forge ahead with the necessary
investments in future growth.

HARVESTING REWARDS
BY OFFERING SOLUTIONS

oday, most asset managers remain

firmly focused on defending and building
actively managed core assets, the traditional
business that has long provided their recurring revenues. They do so even as the market
evolves and the share of those actively
managed assets slowly shrinks as a portion of
the whole.
A smaller group of managers, meanwhile,
are capitalizing on the markets recent
evolution, successfully building capabilities
in solutionsthe asset allocation offerings
that, along with passives and specialties,
now capture a disproportionately large share
of the markets growth. By placing bets on
solutions, these pioneering managers have
stepped into the vanguard to dominate the
markets strongest flow of new assets:
revenues are expected to rise at 2.5 times
the rate of those of actively managed core
assets.

Investors historical focus on maximizing

risk-adjusted returns was undermined by
the volatility of both equity and fixedincome markets during the crisis. A rethinking of investment goals has produced a
stronger recognition that asset pools exist
to satisfy future liabilitiessuch as pension
plan obligations and retirement expenses
not just to maximize immediate returns.

The traditional diversified asset-class

strategies have failed the financial-crisis
test. Correlations between traditional
classes converged, and results suffered.
The winning strategies were more oriented toward macro trends and strategies
that shifted allocation dynamically to take
advantage of opportunities across asset
classesnot only within them.

The increasing complexity and internationalization of financial marketsand

the growing difficulty of navigating
themhas created new, specialized asset
classes along with the need for greater
asset-allocation expertise. The days of the
simple 60-40 domestic equity-bond
portfolio are over.

Small investors have joined institutional

and other large investors in seeking
exposure to esoteric, nontraditional, and
uncorrelated asset classes. They now want
access to hedge funds and private-equity

These managers are tapping a trend toward

solutions that has accelerated since the
financial crisis, driven by several factors:

Investors have grown frustrated and

disillusioned with the performance of
traditional, benchmark-pegged actively
managed core assets. When a benchmark
is down 15 percent, outperforming it by 3
percentage points still produces a loss. A
poor return is a poor return.

The Boston Consulting Group | 21

funds embedded inside solutions, because

they lack the scale or expertise to make
those investments directly themselves.

Identifying and Tapping the

Drivers of Asset Growth
As a result, both retail and institutional investors are increasingly turning toward outcomes
or solutions that are specifically oriented to
their investment needs. The complexity of
managing these solutions while reacting
quickly to market developments has opened
an opportunity for pioneering asset managers
to capture net new flows if they can develop
the appropriate capabilities. In the past, these
solutions have often been the traditional
realm of wealth managers, financial advisors,
and investment consultants.

Solutions have become increasingly customized and

complex in both the institutional and the retail spaces.
As the solution market has grown and
evolved, the nature of solutions themselves
has evolved. They have become increasingly
customized and complex in both the institutional and the retail spaces.
On the institutional side, increasing numbers
of large plans are turning to full and partial
plan-outsourcing services, which, in many
cases, are delivered in a customized fashion
rather than in comingled funds.
True liability-driven investment (LDI)
solutionssuch as those implemented by a
growing number of U.K. and Dutch pension
plansare increasingly customized for
pension funds. These LDI solutions are being
tailored to manage interest rate, credit,
market, and liquidity risks in order to meet
anticipated liabilities. As the market
continues to grow and deepen, we expect
holistic LDI solutions to grow and replace
partial LDI solutions, which are often no
more than portfolios of long-term bonds that
attempt to address liability and risk profiles.
22 | Capitalizing on the Recovery

The key capabilities required for developing

and launching truly holistic LDI solutions are
built on a foundation of deep technical
knowledge. They include actuarial and analytical capabilities, risk management capabilities, and an understanding of liability cash
flows. It is interesting that there are only a
few insurance subsidiaries among the leaders. While insurers generally have the required core capabilities, they often lack relationships with the investment consultants
who intermediate most of the new business
in major pension-fund markets, including the
U.K. and the U.S.

In Retail, an Explosion of
Thematic Solutions
On the retail side, in which packaged solutions have traditionally been more common,
the market is seeing the development of
more custom solutions, as well as an explosion in the types of thematic solutions. Increasingly, the latter target specific outcomes
for retail investors, such as inflation-hedged
funds, income funds, liquidity management,
tail risk management, and volatility-managed,
tax-managed, and absolute-return or risk parity funds.
Target date funds (TDFs), with a more specific asset-allocation glide path, have largely replaced the earlier generation of target risk
funds for retirement planning in many defined-contribution (DC) plans. TDFs currently
total $400 billion in the U.S. and are expected
to grow to $1 trillion by 2016 because they
are the main default-option funds in most DC
plans.
Notably, within the high-growth TDF category, there is a rising demand from DC plans for
customization. The demand is driven by specific needs, as well as the desire for greater
diversification and a growing interest in alternative investments.
Many large corporations are investing in
TDFs tailored to the varying needs of specific
employee groups. These include expected retirement ages, corporate beta exposure, promotion and income curves, and employeestock-option-plan variations in participation
rates and stock portfolios.

Custom TDFs are expected to grow from

$46 billion to $218 billiona CAGR of 36.5
percentfrom 2011 through 2016, as more
large companies with significant resources
discover the benefits of tailoring multiple
glide paths for employees. Highest adoption
rates are expected for larger plansthose
with more than $1 billion in AuM.
Most of this demand will be for semicustom
TDFs, which could meet 80 to 90 percent of
plan needs, with just 9 percent of demand for
truly custom TDFs. Semicustom TDFs provide
such benefits as greater fee transparency,
more diverse asset allocation, and more
control of underlying managers.

The market for solutions is

likely to evolve at a fast pace;
innovation will be critical.
While custom TDFs are currently dominated
by a few managers, this wide range of potential benefits suggests opportunities for other
players to differentiate themselves. They
might do so, for example, by offering access
to real estate investment trusts and commodities, using ETFs and passive management to
reduce fees, or by introducing multimanager
and open-architecture construction.
We believe that the market for solutions is
likely to keep building and evolving at a fast
pace and that innovation will be critical for
players that aim to share in its success. Beyond the current offerings, potential future
trends include the following:

Thematic, personalized solutions

Enhanced TDFs and risk funds

Cheaper beta

Sophisticated alpha generation

Access to private assets

Coinvesting with the managers own

assets

Blurring lines between consultants and

asset managers

Outsourcing investment decisions

Building Capabilities to Surf the

Solutions Wave
Managers hoping to successfully surf the
growing solutions wave face fundamental
decisions about how to participate and what
capabilities they should focus on developing.
As a starting point, managers need to assess
their capabilities in a number of dimensions,
including from a manufacturing perspective.
Do they have the ability to manage money
other than against a defined benchmark? Do
they have an asset allocation capabilitystrategic, as well as tactical and dynamic? Do they
have capabilities across multiple asset classes?
Can they manufacture all the elements of a
solution themselves, or do they need to outsource some asset classes? Do they have a
manager search and oversight capability?
From a distribution perspective, managers
must give careful thought to the design of the
go-to-market model; traditional managers are
unlikely to have existing channels or people
capable of selling solutions. The solution
sales cycle is often longer than a single assetclass sales mandate. Managers must also consider how to circumvent potential channel
conflict with investment consultants and other gatekeepers offering competitive solutions.
It is critical for solutions managers to develop
and maintain relationships with end customers and home officeswithout disintermediating investment consultants.
Finally, managers must develop a thorough
understanding of their cost structure and
maintain rigorous discipline in the pricing of
solutions. This is the case particularly for custom solutions, which may be difficult to scale
across multiple clients. Additionally, managers need to have nimble middle and back offices to facilitate creating and operating a solutions offering.
Managers that succeed in getting these elements right will have the key to unlock enormous growth opportunities.
The Boston Consulting Group | 23

for further reading

The Boston Consulting Group has
published other reports and articles
that may be of interest to senior
financial executives. Recent
examples include those listed here:

Maintaining Momentum in a
Complex World: Global Wealth
2013

A report by The Boston Consulting

Group, May 2013

A report by The Boston Consulting

Group, December 2012

Survival of the Fittest: Global

Capital Markets 2013

Capturing Growth in
Adverse Times: Global Asset
Management 2012

Committing to Customers in the

New New Normal: Operational
Excellence in Retail Banking

Tough Decisions and New

Directions: Global Capital
Markets 2012

A report by The Boston Consulting

Group, April 2013

A report by The Boston Consulting

Group, February 2013

24 | Capitalizing on the Recovery

An Inflection Point in Global

Banking: Risk Report 20122013

A report by The Boston Consulting

Group, September 2012

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Group, April 2012

note to the reader

About the Authors

Gary Shub is a partner and

managing director in the Boston
office of The Boston Consulting
Group and the global leader of the
asset management topic. Brent
Beardsley is a partner and
managing director in the firms
Chicago office and the global leader
of the asset and wealth
management segment. Hlne
Donnadieu is a principal in BCGs
Paris office and the global manager
of the asset management segment.
Kai Kramer is a partner and
managing director in the firms
Frankfurt office. Monish Kumar is
a senior partner and managing
director in BCGs New York office.
Andy Maguire is a senior partner
and managing director in the firms
London office. Philippe Morel is a
senior partner and managing
director in BCGs London office.
Tjun Tang is a senior partner and
managing director in the firms
Hong Kong office.

Acknowledgments

First and foremost, we would like to

thank the asset management institutions that participated in our
current and previous research and
benchmarking efforts, as well as
other organizations that contributed to the insights contained in
this report.
Within The Boston Consulting
Group, our special thanks go to
Lszl Arany, Eric Bajeux, Josh
Lipman, Cristina Rodriguez, Andrea
Walbaum, Yiqi Wang, and Jungeun
Woo. In addition, this report
would not have been possible
without the dedication of many
members of BCGs Financial
Institutions practice, in particular,
Craig Hapelt.

Finally, grateful thanks go to

Jonathan Gage for his editorial
direction, as well as to other
members of the editorial and
production team, including
Katherine Andrews, Gary Callahan,
Philip Crawford, Elyse Friedman,
Kim Friedman, and Sara
Strassenreiter.

For Further Contact

If you would like to discuss your

asset-management business with
The Boston Consulting Group,
please contact one of the authors of
this report.
The Americas
Brent Beardsley
Partner and Managing Director
BCG Chicago
+1 312 993 3300
[email protected]

Andy Maguire
Senior Partner and Managing Director
BCG London
+44 207 753 5353
[email protected]
Philippe Morel
Senior Partner and Managing Director
BCG London
+44 207 753 5353
[email protected]
Asia-Pacific
Tjun Tang
Senior Partner and Managing Director
BCG Hong Kong
+852 2506 2111
[email protected]

Monish Kumar
Senior Partner and Managing Director
BCG New York
+1 212 446 2800
[email protected]
Gary Shub
Partner and Managing Director
BCG Boston
+1 617 973 1200
[email protected]
Europe
Hlne Donnadieu
Principal
BCG Paris
+33 1 40 17 10 10
[email protected]
Kai Kramer
Partner and Managing Director
BCG Frankfurt
+49 69 9 15 02 0
[email protected]

The Boston Consulting Group | 25

 The Boston Consulting Group, Inc. 2013. All rights reserved.

For information or permission to reprint, please contact BCG at:
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