Conquering the Crisis: Global Asset Management 2009

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Conquering the Crisis: Global Asset Management 2009

  1. 1. Report Global Asset Management 2009 Conquering the Crisis
  2. 2. The Boston Consulting Group (BCG) is a global manage- ment consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in- sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet- itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more infor- mation, please visit www.bcg.com.
  3. 3. Conquering the Crisis Global Asset Management 2009 Kai Kramer Brent Beardsley Monish Kumar Andy Maguire Philippe Morel Tjun Tang Hélène Donnadieu July 2009 bcg.com
  4. 4. © The Boston Consulting Group, Inc. 2009. All rights reserved. For information or permission to reprint, please contact BCG at: E-mail: bcg-info@bcg.com Fax: +1 617 850 3901, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA
  5. 5. Contents Preface 5 Six Things to Know About Today’s Asset-Management Market 6 A Snapshot of the Industry 8 The Decline of Global Asset Pools 8 The Loss of Investor Trust 10 The Flight to “Safe” Asset Classes 11 Deteriorating Economics for Asset Managers 13 A Shifting Asset-Management Landscape 15 How Will the Asset Management Industry Change? 16 Investor Trends: The Return of Caution 19 Product Trends: The Reevaluation of Asset Classes 20 Competitive Trends: The Battle for Profitability 25 Seize the Moment: Actions for Asset Managers 27 Plan for the Worst 27 Define the Core Value Proposition of Your Business Model 27 Strengthen Your Core Value Proposition 28 Continuously Refine Your Operating Model 28 Leverage Acquisition Opportunities 29 For Further Reading 30 Note to the Reader 31 Conquering the Crisis 3
  6. 6. 4 The Boston Consulting Group
  7. 7. Preface C onquering the Crisis: Global Asset Management We hope that this report will engage readers and raise 2009 is The Boston Consulting Group’s sev- provocative questions. We also hope that it will encour- enth annual study of the worldwide asset- age asset managers to review the strength and integrity management industry. As in our previous of all aspects of their businesses and prompt them to take reports, this edition contains a comprehen- the actions necessary to ensure not only the viability but sive market-sizing effort. We covered 32 major markets also the prosperity of their institutions in the future. (representing more than 95 percent of the global asset- management market) and focused exclusively on assets About the Authors that are professionally managed in exchange for a fee. We Kai Kramer is a partner and managing director in the also conducted a detailed analysis of the forces that are Frankfurt office of The Boston Consulting Group and shaping the fortunes of asset management institutions leader of the firm’s global Asset Management practice. across the globe. Brent Beardsley is a partner and managing director in BCG’s Chicago office. Monish Kumar is a partner and Moreover, this report contains conclusions drawn from a managing director in the firm’s New York office and the detailed benchmarking exercise of leading industry com- leader of BCG’s global Wealth and Asset Management petitors that BCG conducted early in 2009. Our goal was segment. Andy Maguire is a senior partner and manag- to collect data on fees, products, distribution channels, ing director in the firm’s London office. Philippe Morel and costs in order to draw insights into the current state is a senior partner and managing director in BCG’s Paris of the industry and its underlying drivers of profitability. office. Tjun Tang is a partner and managing director in the firm’s Hong Kong office. Hélène Donnadieu is a prin- In our 2008 report, Winning Strategies in Uncertain Times, cipal in BCG’s Paris office and manager of the firm’s glob- we concentrated on the events surrounding the global fi- al Asset Management practice. nancial crisis that first began to unfold in the summer of 2007. Today, despite some positive market trends that have developed since the beginning of 2009, the crisis is far from over. We therefore devote considerable space in this report both to the consequences of the crisis up to the present time and to the dilemmas that asset managers currently face in their efforts not only to survive the ongo- ing turmoil but also to emerge from it in a strong compet- itive position. The winners will be those that most astute- ly adapt to the evolution of investor behavior and leverage new opportunities—such as acquisitions—that will arise as the industry reshapes itself. Reducing costs even fur- ther and adapting core business and operating models will also be key factors for success. Conquering the Crisis 5
  8. 8. Six Things to Know About Today’s Asset-Management Market T he ongoing financial crisis has had a pro- 34 percent at the end of 2008—the lowest level in five found effect on the asset management in- years. While this decrease may appear to be modest dustry in numerous ways. The following six given the depth of the crisis, the differences among as- points provide a glimpse of the industry’s set managers were substantial. About 30 percent of as- essential characteristics today. set managers were hit extremely hard, seeing their profits decrease by 30 percent or more. Overall, about ◊ In 2008, the global value of professionally managed assets 80 percent of asset managers saw their profits fall in fell by 18 percent to $48.6 trillion.1 This sharp decline 2008, while about 70 percent saw their revenues de- followed average growth of 12 percent per year from crease as well. The revenue effect of declines in 2008 2002 through 2007. Sliding equity markets around the AuM will not be fully apparent until the end of 2009. world were the primary driver of this decrease. ◊ Many asset managers have already reacted to the crisis by ◊ In 2008, investors fled asset classes that were perceived as adopting a series of initiatives aimed at protecting their risky, illiquid, or nontransparent, gravitating toward asset business and positioning themselves for the postcrisis era. classes that were perceived as safe. Investors that chose The question of the moment concerns which addition- to remain in riskier asset classes often chose less ex- al steps asset managers should take now in order to pensive vehicles such as exchange-traded funds (ETFs) prepare themselves for all market possibilities. Both instead of staying with actively managed products. opportunities and risks should arise because a record Money market funds, cash deposits, and ETFs were number of investors are expected to switch asset man- beneficiaries of the crisis. From the end of 2007 agers in the coming months. In our view, asset manag- through the end of 2008, global equity allocations lost ers need to devise contingency plans for various mar- 9 percentage points. Conversely, assets under manage- ket scenarios, define the core value proposition of their ment (AuM) in both money-market and fixed-income business models, strengthen their core value proposi- instruments rose by 3 and 6 percentage points, respec- tions, and continuously refine their operating models. tively. Other asset classes, including alternative invest- They should also take a hard look at potential acquisi- ments, remained stable in overall asset allocation. Tra- tions. Opportunities have arisen that were not feasible ditional actively managed products—particularly 18 months ago. long-only equity funds—will continue to be squeezed by passively managed products and probably to a less- ◊ The crisis could still worsen. Equity markets could de- er degree by innovative products, although the risks cline further and remain distressed, a dramatic rise in associated with innovative offerings must become competitiveness could further constrain revenue pools, more transparent. and additional cost cutting could prove to be extremely ◊ Economics have deteriorated for asset managers. The av- 1. Owing to changes in methodology or in data provided by external erage profit (operating margin) of asset managers fell sources, market-sizing totals may not be consistent with those stat- from 38 percent of net revenues at the end of 2007 to ed in BCG’s previous Asset Management reports. 6 The Boston Consulting Group
  9. 9. difficult. Once asset managers identify and fully under- In parallel to a strategic review of their business mod- stand such potential threats, they must devise ways to els, asset managers need to keep pushing the initia- cope with and even benefit from them. They must also tives that many have started implementing in recent gauge the likely actions of their closest competitors. months to refine their operating models. Such initia- tives include staying close to core clients, bolstering ◊ The crisis presents a unique opportunity for asset manag- risk management, and continuing to search for addi- ers to review what they do best so that they can adjust tional cost-cutting opportunities. their business models and ensure the viability of their in- stitutions in the future. Such a reassessment includes initiatives such as defining target clients and distribu- tion means, and aligning product offerings accordingly. Conquering the Crisis 7
  10. 10. A Snapshot of the Industry A s the worldwide financial crisis has evolved, Sliding equity markets around the world were the prima- the prospects for the asset management in- ry driver of this decrease. Overall, we estimate that global dustry have become uncertain. The impact AuM declined by 19 percent owing to asset depreciation of the crisis has shaken, to some extent, the and that net inflows—if money market funds are includ- foundation of many investors’ core beliefs ed—contributed to slight growth in AuM of 1 percent. in the integrity of investment advisors and fund produc- ers—an effect that may not be just a short-term phenom- On a regional basis, North America was hit hardest by enon. Asset managers, in order to regain both their finan- the crisis, with the value of AuM falling by 21 percent to cial footing and the trust of their customers, must $23.6 trillion. Europe experienced a decline of 15 percent overcome some tough challenges. They must also adapt to $16.4 trillion, and Asia-Pacific suffered a similar drop fast and make potentially radical changes to the way they of 15 percent to $6.1 trillion. Overall, the decline in the do business if they hope to forge and maintain business value of AuM differed widely across countries in 2008. models that will serve them well in the coming years. (See Exhibit 2.) Critical questions remain: Is the industry capable of re- The Americas remained the largest asset-management making itself into a leaner, more trustworthy, more ro- market, dominated by the United States, which had bust enterprise? Have industrywide profit margins of $22 trillion in AuM at the end of 2008 compared with more than 40 percent of net revenues, such as those wit- $28 trillion at the end of 2007. Net U.S. inflows (including nessed in 2006, become a quaint relic of the past? In our both retail and institutional money) were roughly view, asset managers must begin the journey toward bet- $350 billion. However, if assets flowing into money mar- ter times by fully understanding the depth of the current ket funds were excluded, the U.S. market suffered from crisis and the dynamics that it has set in motion. These roughly $300 billion in outflows. The Canadian market dynamics include the decline of global asset pools, the weathered the year relatively well by comparison, with loss of investor trust, the flight to “safe” asset classes, AuM decreasing by 15 percent to $1.6 trillion. Brazil, the and deteriorating economics for asset managers. Ulti- third-largest market in the Americas, was one of the few mately, the landscape of the industry is changing, and countries witnessing only a slight decrease in AuM— those institutions that best grasp the nature of this roughly 1 percent to $590 billion. Such a small decrease, change—and that take bold action—will be best posi- amid a collapse of more than 40 percent in Brazil’s equi- tioned to benefit. ty market, can be explained by the fact that fixed-income investments accounted for more than 80 percent of AuM The Decline of Global Asset Pools in Brazil. In 2008, the global value of professionally managed as- In Europe, total outflows from retail funds were signifi- sets fell by 18 percent to $48.6 trillion. (See Exhibit 1.) cant—approximately $492 billon. These outflows were This sharp decline followed average growth of 12 percent driven principally by two factors: the flight of investors per year from 2002 through 2007. from mutual funds to cash deposits, which were widely 8 The Boston Consulting Group
  11. 11. Exhibit 1. The Value of Global AuM Fell 18 Percent in 2008 Assets under Management, 2002–2008 ($trillions) –21 12 –15 29.9 10 23.6 17.1 19.2 –13 13 –16 16.4 27 12.0 5.0 4.2 0.7 2.2 1.9 2.7 2002 2007 2008 2002 2007 2008 2002 2007 2008 2002 2007 2008 North America Europe Asia (excluding Japan Japan and Australia and Australia) –18 25 –1 15 –14 12 59.3 48.6 0.2 0.6 0.6 0.4 0.8 0.7 34.1 2002 2007 2008 2002 2007 2008 Brazil The Middle East and South Africa 2002 2007 2008 Annual growth, 2002–2007 (%) Annual growth, 2007–2008 (%) Global1 Source: BCG Global Asset Management Market Sizing database, 2009. Note: North America consists of Canada and the United States; Europe of Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, the Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden, Switzerland, and the United Kingdom; and Asia of China, Hong Kong, India, Korea, Singapore, and Taiwan. For all countries whose currency is not the U.S. dollar, we have used the average 2008 exchange rate for all years to avoid a currency impact in growth rates. Owing to changes in methodology or in data provided by external sources, market-sizing totals may not be consistent with those stated in previous BCG Asset Management reports. 1 Global includes offshore money not already included in specific market sizing. Exhibit 2. The Decline in AuM Varied Across Countries in 2008 AuM CAGR, 2007–2008 (%) 10 Change in AuM, 2007–2008 Scale = $200 billion South Africa 0 Singapore Brazil Czech Republic Germany Norway Korea Luxemburg Hong Kong Sweden –10 India Denmark Canada Spain Portugal Switzerland France2 Ireland Japan2 United Kingdom1, 2 Taiwan The Middle East Australia –20 Belgium Finland China United Italy States1, 2 Austria Russia Poland The Netherlands –30 Greece 0 1 2 22 23 North America Brazil Western Europe Eastern Europe AuM, 2008 ($trillions) Japan and Australia Asia (excluding Japan and Australia) The Middle East and South Africa Source: BCG Global Asset Management Market Sizing database, 2009. Note: For all countries whose currency is not the U.S. dollar, we have used the average 2008 exchange rate. 1 AuM change was $6 trillion for the United States and $860 billion for the United Kingdom in 2008. 2 Total AuM were $3.1 trillion for France, $3.3 trillion for Japan, $4.9 trillion for the United Kingdom, and $22 trillion for the United States. Conquering the Crisis 9
  12. 12. perceived as safe and government protected, and the ef- their own best interests at heart—not those of their cli- forts of banks—which dominate fund distribution in con- ents. The overall damage was worse than that inflicted by tinental Europe—to push deposit products in order to the bursting of the dot-com bubble because more inves- meet refinancing needs. tors were hurt in asset classes that were presumed to be reliable. Even a small percentage of money market funds Across Europe, these dynamics varied by country. Italy had used credit default swaps and other structured prod- and Spain, for example, each saw 2008 outflows from mu- ucts to sometimes generate superior performance. When tual funds reach 20 percent of end-2007 AuM. Yet the such funds, some of which came highly recommended, United Kingdom witnessed positive net inflows (albeit started to suffer losses, investors began to question both just barely) thanks to independent financial advisors— the advice they had received and the risk management key distributors in the U.K. landscape—who continued to skills of producers. They also began to wonder about the steer clients toward mutual funds. competence of distributors that failed to carry out the necessary due diligence to understand and communicate In Asia-Pacific, four key markets—Australia, China, India, the true nature of these funds to buyers. and Japan—varied in their 2008 performance. In Japan, the value of total AuM was $3.3 trillion at the end of 2008, Unforeseen Market Correlations. The strong growth in down from $3.9 trillion a year earlier. The decline was recent years of many satellite and alternative invest- driven by AuM decreases of 32 percent on the retail side ments was fed by the promise of reducing portfolio risk and 9 percent on the institutional side, where the asset though diversification. When many of these promises mix is skewed more toward fixed-income investments failed, some high-net-worth and institutional investors than equities. The Australian market was hit harder be- had to learn the tough lesson that some alternative asset cause of its higher share of equity. Overall, the value of classes are more correlated with equity markets than they AuM in Australia fell 20 percent to $921 billion in 2008. previously had thought. Even some large institutional in- In China, after AuM more than doubled in 2007 (thanks vestors with benchmark asset allocations—such as state both to growing asset values and to robust inflows), the pension funds and university endowments in the United situation deteriorated in 2008 with AuM decreasing by States—lost substantial assets in the crisis. Investors in 22 percent to $671 billion. On the retail side, amid falling this category that have been exposed to alternative and equity markets and low net inflows, AuM fell by 33 per- satellite investments for a long time may be content to cent. The decline was partly compensated for by relative- wait out the downturn and maintain their asset alloca- ly stable AuM on the institutional side, which was buoyed tions. Others that are new to these asset classes may act by growing insurance assets. In India, overall AuM de- differently. creased by about 9 percent as the country experienced a 17 percent decrease in retail AuM—driven primarily by Fraud. The most egregious example of bad investment falling equity markets—and a 1 percent decline in insti- advice, the headline-grabbing Bernard L. Madoff scandal, tutional AuM. certainly contributed to the image of high-powered in- vestment gurus as people who have nothing but their The Loss of Investor Trust own interests and wealth in mind. As a result, future promises of steady, superior returns with little volatility Investor confidence in the asset management industry or risk—no matter who in the financial world is making has been clearly damaged by the crisis. Indeed, the im- such pledges—will be met more with skepticism, even pact of the crisis has gone beyond traditional fears about cynicism, than with genuine interest and a willingness to market capriciousness. Investors are concerned about du- invest. bious advice, unforeseen market correlations, and even fraud. Ultimately, asset managers must face the fact that inves- tor trust has taken a severe hit—one that may reverber- Dubious Investment Advice and Poor Product Trans- ate for many years—and that they will have to work ex- parency. The subpar performance of many products that tremely hard to regain the loyalty they once enjoyed. had been highly touted by investment advisors led many Regulators, for their part, will be scrutinizing the invest- private investors to believe that the advisors had only ment industry more closely. 10 The Boston Consulting Group
  13. 13. The Flight to “Safe” Asset Classes United States and Europe in 2007 and 2008 illustrate these dynamics. (See Exhibit 3.) A dominating trend in 2008 was the global flight away from asset classes that were perceived as risky, illiquid, or The Decline of Long-Only Equity. Long-only equity nontransparent toward those perceived as safe—or at funds suffered greatly in 2008 as global equity markets least safer. Investors that chose to remain in riskier asset fell by about 42 percent, according to the MSCI World In- classes often chose less expensive vehicles such as ETFs dex. There were, of course, significant variations across instead of staying with actively managed products. regions: 30 percent in Japan, for example, compared with 48 percent in Europe and 55 percent in emerging mar- Beneficiaries of the Crisis: Cashlike Vehicles and kets, according to MSCI regional indexes. Indeed, asset ETFs. Globally, from an asset allocation standpoint, the managers suffered from net outflows in long-only funds winners since the crisis first hit home have been money across all regions and client segments, with Europe being market funds, which benefited from a total of more than hardest hit. $1.5 trillion in net inflows in 2007 and 2008, and savings deposits, which grew collectively in the United States and The Exit from Hedge Funds. AuM in hedge funds plum- Europe from $17.9 trillion in July 2007 to $20.6 trillion at meted to around $1.4 trillion at the end of 2008 from a the end of March 2009. In addition, as the performance peak of approximately $1.9 trillion in June 2008. (See Ex- of actively managed funds has increasingly come into hibit 4.) The decline was driven both by negative returns, question, we have witnessed a stepped-up search for beta which accounted for two-thirds of the decrease, and by (passively managed) investments, owing to lower man- outflows, which accounted for the remaining one-third. agement fees and a higher degree of liquidity and trans- Retail and high-net-worth investors, exiting because of parency. This has occurred despite the fact that beta in- poor performance, accounted for roughly 80 percent of vestments have obviously suffered from falling equity outflows. Many alternative strategies turned out to be markets as well. Sales of mutual funds and ETFs in the more linked to the market than had been envisioned. Exhibit 3. Money Market Funds and ETFs Have Benefited from the Crisis, While Equities Have Suffered U.S. sales of mutual funds and ETFs European sales of mutual funds and ETFs Net sales ($billions) Net sales ($billions) 1,500 200 159 118 101 91 52 1,026 15 4 9 1,000 655 0 587 –37 636 –95 500 –200 –232 –242 93 109 134 153 31 22 13 23 0 –400 –113 –21 –407 –235 –500 –600 Total Money Equity Fixed Hybrid/ Equity Fixed Total Money Equity Fixed Hybrid/ Equity Fixed market income other income market income other income Traditional ETFs Traditional ETFs mutual funds mutual funds 2007 2008 Sources: EFAMA; Feri; ICI; press; BCG analysis. Conquering the Crisis 11
  14. 14. Exhibit 4. Hedge Fund Assets Plunged in the Second Half of 2008 Assets ($billions) 2,000 1,931 1,868 1,465 1,500 1,407 1,105 973 1,000 820 626 491 539 500 0 2000 2001 2002 2003 2004 2005 2006 2007 H1 2008 H2 2008 Net asset 23 46 99 70 73 46 126 194 29 –390 flows ($billions) Hedge funds Funds of hedge funds Sources: Hedge Fund Research. Other reasons for exiting from hedge funds were a lack of to some product areas, the trends were less clear in other transparency and a fear of illiquidity when some hedge categories such as structured products. In fact, structured funds put up redemption barriers. products are a very broad category with significant differ- ences in investment strategies. As a result, various types Within the hedge fund segment, funds of hedge funds of these products faired differently. (FoHF) were hit particularly hard for several reasons. First, a large share of FoHF investors perceived these invest- Generally, structured products that are sold as investment ments as short term and liquid, often because the invest- certificates—typically issued by investment banks and le- ments were sold as such by some distributors. Second, gally bearing a counterparty risk—lost significant value, FoHF posted even lower returns than standalone hedge mainly in Europe where they are relatively common. In funds because they were often burdened by very high Germany, previously the European market leader for management fees. Third, FoHF were even less transparent such products, the value of nonguaranteed certificates fell than standalone hedge funds. Fourth, the Madoff scandal by almost 60 percent—from €104 billion at the end of helped tarnish the reputation of managers of FoHF, nota- 2007 to €44 billion at the end of 2008 after the collapse of bly their ability to carry out sufficient due diligence. Lehman Brothers made investors more aware of the risks involved. Still, structured products that provided a capital The Private-Equity Slowdown. Investors grew more guarantee fared comparatively well, with positive inflows conscious of the higher risks of private equity only late in of €3.7 billion in France and €5.8 billion in Germany 2008. After three strong quarters in which private-equity in 2008. firms were slightly ahead of their record 2007 pace, fourth-quarter fund raising slowed to a virtual standstill. Relative Stability in Institutional Funds. Putting all these trends together, it is not surprising that retail funds Unclear Trends in Structured Products. Although there have suffered more in the crisis than institutional funds. were clear winners and losers in the crisis when it came (See Exhibit 5.) Since retail funds have carried a high 12 The Boston Consulting Group
  15. 15. Exhibit 5. Retail Assets Have Been Hardest Hit, While Institutional Assets Have Been More Resistant Retail AuM Institutional AuM –22 –15 $billions 23,995 $billions 35,290 Insurance 29,964 Mutual 7,716 9,632 18,680 funds –5 7,315 6,651 –31 Unit-linked insurance 2,232 19,715 –11 Pension funds 1,983 15,929 –19 Unit-linked 5,218 personal pensions 4,730 –9 Corporations Private 5,322 2,454 –11 banking 4,081 –23 Nonprofits 2,181 and governments 2,985 2,559 –14 Offshore money 1,591 1,236 –22 2,420 1,980 Banks –18 2007 2008 2007 2008 Annual change (%) Source: BCG Global Asset Management Market Sizing database, 2009. Note: For all countries whose currency is not the U.S. dollar, we have used the average 2008 exchange rate for all years to avoid a currency impact. Some figures may not add up to totals shown because of rounding. share of equities, legions of private investors switched This was less dramatic than the 18 percent decline in from them to savings deposits. As a result, the global per- global AuM because equity markets in the first half of centage split between retail and institutional AuM moved 2008 held their own before declining more sharply in the from 40-60 at the end of 2007 to 38-62 at the end of 2008. second half of the year. Overall, the revenue decline was A clear message for asset managers is that although insti- driven by a 5 percent drop in average AuM value over the tutional business is less profitable than retail business, it year, as well as by a shift to lower-margin products and is also more resistant and more stable—and therefore channels.2 However, the full revenue effect of the 2008 able to provide welcome diversification to an asset man- decrease in the value of AuM will not be evident until the ager’s business portfolio. end of 2009. Even if markets recover somewhat in the second half of 2009, year-end revenues are likely to show So far, the crisis has altered the dynamics of global asset a significant decline. allocation considerably. (See Exhibit 6.) From the end of 2007 through the end of 2008, equity allocations lost 9 The average profit (operating margin) of asset managers percentage points. Conversely, AuM in both money-mar- fell from 38 percent of net revenues at the end of 2007 to ket and fixed-income instruments rose by 3 and 6 per- 34 percent at the end of 2008—the lowest level in five centage points, respectively. Other asset classes, including years. (See Exhibit 7.) Although this decrease may appear alternative investments, remained stable in overall asset modest given the depth of the crisis, the differences allocation. among asset managers were substantial. About 30 per- Deteriorating Economics for Asset Managers 2. The decline of average AuM in 2008 was less than the decline of end-of-year AuM in 2008. The reason is that average 2007 AuM was below end-of-year 2007 AuM (owing to a growing market), while According to our benchmarking survey, the global asset- average 2008 AuM was above end-of-year 2008 AuM (owing to a management revenue pool shrunk by 12 percent in 2008. declining market). Conquering the Crisis 13
  16. 16. Exhibit 6. The Crisis Has Shifted the Allocation of Global Assets Overall Focus on retail Focus on institutional asset allocation asset allocation asset allocation 100% 100% 32 100% 100% 44 100% 100% 27 41 51 36 21 32 38 19 30 26 14 19 11 13 11 11 14 14 12 16 16 11 2 3 3 3 2 3 4 4 2 2 6 5 2007 2008 2007 2008 2007 2008 Equity Fixed income Money market Hybrid/balanced Structured products Alternative Source: BCG Global Asset Management Benchmarking, 2009. Note: Estimates are based on 50 global asset managers. Some figures may not add up to totals shown because of rounding. Exhibit 7. Economics for Asset Managers Have Deteriorated Revenue margins have declined... ...resulting in declining operating margins Net revenues –7 (basis points) Operating margins (percentage of net revenues) 40 33.7 35.6 37.0 34.3 31.2 32.8 50 20 40 40 38 38 0 34 34 2003 2004 2005 2006 2007 2008 30 27 …faster than costs... Costs 20 (basis points) –1 40 22.7 21.6 20.9 21.4 23.1 22.8 10 20 0 0 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 Annual change (%) Source: BCG Global Asset Management Benchmarking, 2009. 14 The Boston Consulting Group
  17. 17. cent of asset managers were hit extremely hard, seeing tally rethink their business models. As a result, the indus- their profits decrease by 30 percent or more. try landscape is shifting. Some institutions have decided to exit all or part of their asset-management activities. Overall, about 80 percent of asset managers that partici- Others have begun redesigning their operating models— pated in our study saw their profits fall in 2008, while including through partnerships or mergers. about 70 percent saw their revenues decrease as well. (See Exhibit 8.) Still, roughly 20 percent of asset managers post- We have seen new types of mergers and acquisitions de- ed higher profits. Some of these successes were driven by signed to industrialize the entire production of funds or product focus—such as alternative specialists whose prod- individual parts of it. We have also witnessed some dras- ucts performed unusually well or institutions that benefit- tic steps—such as aggressively cutting management fees ed from extraordinary growth in money market funds. for some products—that never would have been consid- Others were driven by a regional focus—for instance, on ered before the crisis. Virtually all asset managers in the select emerging markets that bucked downward global United States and roughly 80 percent of those in Europe trends. The few traditional asset managers able to in- have already undergone one or two rounds of cost cutting crease profits in 2008 were helped by aggressive cost-cut- since the crisis began. Many such cost efforts are still in ting programs. While about 57 percent of asset managers progress and are far from being completed. The lingering were able to reduce their total costs, only about 25 percent question is whether the cost reductions will be sufficient were able to make cuts of more than 10 percent. if the markets take another turn for the worse. In any event, the shifting landscape will almost certainly lead to A Shifting Asset-Management a new wave of consolidation in the industry. Landscape The deep drop in profits has forced numerous asset man- agers to look beyond cost-cutting efforts and fundamen- Exhibit 8. Around 80 Percent of Asset Managers Saw Their Profits Decrease in 2008 Distribution of revenue and cost evolution Distribution of profit changes across institutions across institutions Revenues evolution, 2007–2008 Profit evolution, 2007–2008 Percentage of institutions Percentage of institutions 40 40 27 23 17 19 20 4 6 4 29 30 0 > –30 –30 –20 –10 0 10 >20 % to –20 to –10 to 0 to 10 to 20 23 20 19 Costs evolution, 2007–2008 Percentage of institutions 10 40 10 8 31 6 4 17 19 20 15 10 2 6 0 0 > –30 –30 –20 –10 0 10 >20 % > –30 –30 –20 –10 0 10 >20 % to –20 to –10 to 0 to 10 to 20 to –20 to –10 to 0 to 10 to 20 Source: BCG Global Asset Management Benchmarking, 2009. Conquering the Crisis 15
  18. 18. How Will the Asset Management Industry Change? T here is no doubt that the asset management tain asset classes or in certain geographies. Such ac- industry will undergo some fundamental tions would alter business models. Average industry changes as a result of the current crisis. Ex- profitability would fall close to zero, and many asset actly how these changes will manifest them- managers would be forced out of the business alto- selves over the next five to ten years is still, gether. A massive wave of consolidation would occur. of course, a matter of speculation. At this stage, no one can predict what will happen next. And, as history shows, ◊ Recovery. In a more optimistic scenario, the value of things could get worse. The current downturn has led to global AuM would begin to rebound in 2010, rising to losses worse than those of both the oil crisis of the 1970s within 10 percent of its 2007 peak by 2012. (See Ex- and the dot-com crash early in this decade. But they are hibit 11.) Yet despite a recovery in asset levels, reve- still not as bad as those of the Great Depression. (See Ex- nues would not keep pace, lagging by as much as 20 hibit 9.) percent behind their 2007 high point. Again, players would be forced to carry out additional cost cutting, Yet in order to prepare for any eventuality, asset manag- although not as drastically as under the Armageddon ers need to examine how different market scenarios might scenario. Industry profitability would remain 5 to determine the course that their business takes. Broadly 15 percentage points below its 2007 level. We would speaking, the markets could take a sharp turn for the see wide variations in performance across institutions, worse, recover modestly and gradually, or take a strong with a fair number suffering from very low (less turn for the better. Let’s briefly look at the three scenarios, than 10 percent) or even negative profitability which we call Armageddon, Recovery, and Happier Days. through 2012. Our objective is not to predict which scenario is the most likely to occur but to illustrate how the asset management ◊ Happier Days. In our most optimistic scenario, the as- industry would feel the impact of each scenario. set management industry would more or less return to business as usual by 2012, with AuM back to or ◊ Armageddon. In our worst-case scenario, we envisage a higher than its 2007 level. (See Exhibit 12.) Financial long and deep recession with markets falling by as markets would regain upward momentum quickly, in- much as 60 percent from their 2007 peaks. (See Exhib- vestors would gradually go back to precrisis asset al- it 10.) Markets would come back very slowly, investors locations and product preferences, and regulation would remain extremely risk averse and biased toward would be benign. Even so, profitability might not quite passive products, and regulation would be aggressive. keep pace with rising asset levels, owing to lower rev- In such a scenario, we would see a dramatic decline of enues stemming from the crisis-driven shift toward AuM and revenues—as much as 35 percent for each— lower-margin products. Given wide variations in how from 2007 through 2012. Asset managers would be successful institutions would be at cutting costs and forced to carry out massive cost-cutting efforts in order maintaining sufficient revenues, some asset man- to offset the revenue collapse. The cost cutting typical- agers could still have low or negative profitability ly would involve such steps as exiting activities in cer- through 2012. 16 The Boston Consulting Group
  19. 19. Exhibit 9. The Current Crisis Has Been Less Dramatic than the Great Depression (%) 0 –20 –40 –39.6% 60% rebound –48.4% –49.1% –51.9% –60 –56.8% Initial crash –80 Banking crises— credit unavailable –89.2% –100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Months from peak to trough June 12, 2009 Dow Jones, 1929–1932 (Great Depression) S&P 500, 1973–1974 (Oil crisis) S&P 500, 2000–2002 (Dot-com crash) S&P 500, 2007–2009 (Subprime crisis) Sources: Bloomberg; Thomson Datastream; BCG analysis. Note: S&P 500: current per June 12, 2009; Dow crash, 1929: September 3, 1929 to August 8, 1932; oil crisis crash, 1973: January 5, 1973 to October 3, 1974; dot-com crash, 2000: March 24, 2000 to October 9, 2002; subprime crisis: October 9, 2007 to present. Exhibit 10. The Armageddon Scenario A Sharp Turn for the Worse Key assumptions Implications Average AuM Operating margins ($trillions) (percentage of ◊ Deep economic recession continues net revenues) Drop of Drop of 25 to 40 ◊ Inflation is restrained as the 75 30 to 35 percent 50 percentage points economy fails to recover 40 50 30 ◊ Severe outflows are comparable to the worst period since 1970 20 25 ◊ Long-term decline of equity continues 10 0 0 ◊ Within equity and fixed income, there 2007 2008 2009 2012 2007 2008 2009 2012 is a major shi to passive products ◊ Revenues fall owing to decreasing Revenues (basis points) Costs (basis points) AuM, product shi, and price 50 Drop of 50 Increase of pressure on alternative products 25 to 35 percent 2 to 7 percent 40 40 ◊ Costs are cut back as much as possible as the economy fails to recover 30 30 20 20 10 10 0 0 2007 2008 2009 2012 2007 2008 2009 2012 Source: BCG analysis. Conquering the Crisis 17
  20. 20. Exhibit 11. The Recovery Scenario A Modest and Gradual Rebound Key assumptions Implications Average AuM Operating margins ($trillions) (percentage of net revenues) ◊ The economy fails to return to growth before 2011 but still experiences Drop of Drop of 5 to 15 75 5 to 10 percent 50 percentage points a gradual recovery 40 ◊ Inflation is restrained 50 as the economy falters 30 20 ◊ Slow outflows occur in 2009 owing 25 to low interest rates—inflows 10 then return but remain lower 0 0 than precrisis levels until 2012 2007 2008 2009 2012 2007 2008 2009 2012 ◊ Long-term decline of equity continues Revenues (basis points) Costs (basis points) ◊ Within equity and fixed income, there Drop of Increase of 2 percent is a major shi to passive products 50 15 to 20 percent 50 to drop of 5 percent 40 40 ◊ Revenues fall owing to decreasing AuM, product shi, and price 30 30 pressure on alternative products 20 20 ◊ Costs are contained until 10 10 the economy recovers 0 0 2007 2008 2009 2012 2007 2008 2009 2012 Source: BCG analysis. Exhibit 12. The Happier-Days Scenario A Strong Turn for the Better Key assumptions Implications Average AuM Operating margins ($trillions) (percentage of net revenues) Increase of Drop of 0 to 5 ◊ The economy is positive in 2010, with 10 to 20 percent percentage points 75 50 a return to consumer confidence 40 ◊ Inflation is restrained until 50 30 the economy recovers 20 25 ◊ Inflows increase strongly, making 10 up for some of the crisis 0 0 2007 2008 2009 2012 2007 2008 2009 2012 ◊ “Investor amnesia”: investors return to equity at precrisis levels Revenues (basis points) Costs (basis points) ◊ Revenues fall owing to product shi and price pressure on alternative 50 Drop of 50 Drop of products 10 to 15 percent 5 to 10 percent 40 40 ◊ Overall costs are reduced until the 30 30 economy recovers and increase again 20 20 aerwards, but more slowly than AuM 10 10 0 0 2007 2008 2009 2012 2007 2008 2009 2012 Source: BCG analysis. 18 The Boston Consulting Group
  21. 21. Several factors will determine which scenario—or any the beginning of the decade.) Their investment decisions number of variations thereof—actually comes to pass. Of have often been influenced by marketing stories that course, first and foremost will be the state of financial promise attractive equity returns. Yet because these in- markets. Other factors include the evolving health of the vestors have become more risk averse and will likely stay overall financial-services sector and the changing regula- that way, their allocations to equity investments will de- tory climate. In any event, certain trends in investor be- cline. Indeed, their caution will extend beyond equities to havior and product dynamics that have been unleashed fixed-income and innovative investments. Distributors, by the financial crisis will be with us for some time to for their part, will be prompted by regulators to be more come. Let’s look at these trends in more detail. diligent in their sales approach and more transparent about the risks associated with different types of invest- Investor Trends: The Return of Caution ments—and about fee structure as well. Nonetheless, analysis shows that marketing innovation was still effec- We believe that the depth of the current financial crisis tive in attracting inflows from this segment in 2008. will prompt investors to be more conservative and more Across markets, products that were less than three years deliberate in their decisions about a wide variety of is- old managed to maintain strong net inflows—albeit low- sues—including the matter of whom they entrust their er than 2007 levels—whereas older products suffered assets to—in the medium to long term. But there will be from outflows virtually everywhere. (See Exhibit 13.) We variations among different investor categories, such as believe that, going forward, marketing innovation will re- mass affluent, high net worth, and institutional. main critical to success in retail asset management, even if its effect may be less than it was before the crisis. Mass-Affluent Investors. Many investors in this segment have now suffered two rounds of substantial losses within High-Net-Worth Investors. Since the key goal for many a relatively short period because of sharply declining eq- high-net-worth investors is to preserve rather than to uity markets. (The first round was the dot-com crash at grow wealth, we believe that this client class will main- Exhibit 13. Marketing Innovation May Remain Critical to Success in Retail Asset Management Inflows into new versus Inflows into new versus Inflows into new versus old mutual funds in the old mutual funds in the old mutual funds in United States United Kingdom Germany Net inflows/ Net inflows/ Net inflows/ total AuM (%) total AuM (%) total AuM (%) 20 20 20 10 10 10 0 0 0 –10 –10 –10 –20 –20 –20 2007 2008 2007 2008 2007 2008 Old products New products Sources: Morningstar and Feri databases; BCG analysis. Note: New products consist of mutual funds that are less than three years old. Conquering the Crisis 19
  22. 22. tain a relatively conservative outlook. In a highly uncer- their needs mean that asset managers will have to offer tain environment, wealth management solutions based such investors increasingly customized approaches. on excellent asset-allocation skills will gain importance. The debate over whether fees for actively managed eq- Product Trends: The Reevaluation uity investments are justified or whether cheaper, passive of Asset Classes management is sufficient will rage on. The taste for alter- native products will fade somewhat, given that many In past reports on the global asset-management industry, such investments have either lacked sufficient liquidity or we have highlighted the ongoing squeeze on traditional proved to be more correlated with the market than previ- actively managed products exerted both by passively ously was thought—and thus performed poorly. managed and innovative offerings. This dynamic should continue for the foreseeable future, albeit probably to a Institutional Investors. Institutional investors have sus- lesser degree when it comes to innovative products. In ad- tained substantial losses during the crisis despite highly dition, the crisis is leading to a fuller reevaluation of many diversified strategies. They will likely continue to increase asset classes and their attractiveness to investors. Exhibit the diversification of their portfolios and seek innovation 14 provides an overview of growth expectations across to help them achieve this goal. But as they more deeply products, assuming the economic context of our Recovery reassess the average long-term returns and volatility asso- scenario. (Under the Armageddon or Happier Days sce- ciated with equities, they may structurally review their as- narios, the picture would look considerably different.) set allocation and decrease their share—at the same time Let’s examine some of these asset classes in closer detail. striving to find new pockets of diversification. To improve net returns on their remaining equity allocations, they will Passively Managed Products. Even though research has likely push to negotiate lower fees and move from active long shown that active managers beat the market barely toward passive management. The growing sophistication 50 percent of the time over one-year periods—and even of institutional investors and the deepening complexity of less over longer periods—many investors have taken note Exhibit 14. The Crisis Will Lead to a Reevaluation of Asset Classes CAGR, 2008–2012 (%) ETFs Passive products/ETFs Innovative products Passive fixed income Liability-driven investments Real estate Infrastructure funds Passive equity (including REITs) Commodities Absolute return Fixed-income Short-extension funds core and Structured products specialties Quantitative products Hedge funds Equity core Money and specialties market Private equity Active products Net revenue margin (basis points) Active Passive Innovative Estimated size, 2008 ($trillions) Scale = $1 trillion Source: BCG analysis. 20 The Boston Consulting Group
  23. 23. of this reality only in the wake of the current crisis. For tion regarding the risk-return profile of equity instru- this reason, among others that we have already addressed, ments. To be sure, the traditional belief that equities pro- the growth of passively managed products such as ETFs vide better long-term returns than other asset classes is that offer cheap beta will accelerate. Indeed, in an envi- coming under scrutiny. Analysis shows that the average ronment in which expectations of long-term risk-adjusted difference between equity and fixed-income returns on returns are decreasing, investors will favor lower-cost 20-year investments has actually decreased over the past products that provide average, market-tracking returns. ten years. Since 1925, the historical difference has been ETFs often fit well with the strategic or tactical objectives 5.9 percent. But for 20-year investments from which in- of institutional and high-net-worth investors because they vestors divested from 1998 through 2008, that difference establish a broad index-tracking position or provide inter- narrowed to 2.7 percent. im beta during the search for a better opportunity. More specifically, ETFs can help institutional investors rebal- The perceived risk level associated with equities has ance their portfolios and can even represent an alterna- clearly come under review. It is interesting to note that tive to derivatives. Despite increasing concern regarding out of the nine major downturns suffered by equity mar- counterparty risk, ETFs are poised for further growth, par- kets since 1970, seven of them occurred more than 15 ticularly on the institutional side. years ago. Only two happened within the past ten years. (See Exhibit 16.) Given the lower overall volatility of eq- Actively Managed Products. Perhaps the foremost trend uity markets over the past decade, we believe that many in actively managed products is the continuing shift out investors simply lost sight of the true risk associated with of long-only equity allocations. An analysis of asset mixes equities and that the current crisis has brought the issue in U.S. mutual funds, for example, shows how equity al- back to the fore. locations can decline during tough economic times. (See Exhibit 15.) In our view, the most recent downward trend Equity allocations are also declining because baby boom- will help drive a fundamental change in investor percep- ers are starting to reach retirement age. (See Exhibit 17.) Exhibit 15. Equity May Be Losing Its Luster Asset mixes change significantly in downturns Average excess equity returns have fallen The evolution of the asset mix of U.S. mutual funds The difference between U.S. equity annual average rates of return1 and U.S. government-bond annual average rates of return for 20-year investments AuM (%) Percent 100 20 Hybrid Bond 15 Historical average2 75 10 5.9 Money market 5 50 0 2.7 Average –5 since 1998 25 Equity –10 0 –15 1970 1975 1980 1985 1990 1995 2000 2005 2008 1998 2000 2002 2004 2006 2008 Divestment year Sources: ICI; Barclays Equity Gilt Study 2009; BCG analysis. 1 Annual average rates of real returns with gross income reinvested. 2 Average delta between annual average rates of real return for U.S. equity and annual average rates of real return for U.S. government bonds, for investments since 1925. Conquering the Crisis 21
  24. 24. Exhibit 16. Only Two Severe Market Downturns Have Occurred in the Past Ten Years 1 S&P 500 quarterly average of monthly changes (%) 10 1 2 3 4 5 6 7 8 9 5 0 –5 –10 1970 1975 1980 1985 1990 1995 2000 2005 2008 High interest rates, The oil crisis and The Volcker The savings-and- The bursting of The housing- credit scarcity, and aermath disinflationary loans collapse the dot-com market crash decline in government of the collapse of monetary policy and oil price bubble and subprime- spending Bretton Woods and aermath increase lending crisis of the oil crisis S&P 500 index Market cycle contractions Market cycle contractions associated with a recession Sources: National Bureau of Economic Research; Standard & Poor’s Financial Services; ICI. 1 Corresponds to the quarterly average of month-to-month changes. For example, Q1 averages December-to-January, January-to-February, and February- to-March changes. Exhibit 17. The Number of Retirees in the United States Is Soaring as Baby Boomers Retire 1970 1990 2010 (estimated) 2030 (estimated) 80+ 80+ 80+ 80+ 75–79 10% 75–79 12% 75–79 13% 75–79 19% Retirees 70–74 70–74 70–74 70–74 65–69 65–69 65–69 65–69 60–64 60–64 60–64 60–64 55–59 55–59 55–59 55–59 50–54 50–54 50–54 50–54 45–49 45–49 45–49 45–49 40–44 40–44 40–44 40–44 35–39 35–39 35–39 35–39 30–34 30–34 30–34 30–34 25–29 25–29 25–29 25–29 20–24 20–24 20–24 20–24 15–19 15–19 15–19 15–19 10–14 10–14 10–14 10–14 5–9 5–9 5–9 5–9 0–4 0–4 0–4 0–4 0 10,000 20,000 0 10,000 20,000 0 10,000 20,000 0 10,000 20,000 thousands thousands thousands thousands Baby boomers Sources: U.S. Census Bureau; U.S. Social Security Administration; BCG analysis. Note: U.S. baby boomers are the generation born between 1944 and 1964. 22 The Boston Consulting Group
  25. 25. As this happens, pension funds will need to switch large al investors, but regulatory improvements will not result chunks of equities in their portfolios to less volatile asset in a massive return to these products by high-net-worth classes. Some industry experts predict that equity alloca- individuals in the short to medium term. In our Recovery tions in pension funds will fall from roughly 55 percent in scenario, the annual growth rate for hedge funds from 2007 to as low as 20 percent by 2015. We foresee a less 2008 through 2012 would likely be comparable to that of precipitous drop to between 35 percent and 45 percent. traditional actively managed products. Actively managed fixed-income products The most successful hedge funds will be will benefit from retiring baby boomers. those that have maintained some liquidity Accordingly, asset managers with strong Actively managed (and have not put up redemption gates) track records in fixed income will gain fixed-income products and that provide true transparency and most from this growth since investors have strong risk management. Those that focus become much more sophisticated about will benefit from on absolute returns may have an advan- this asset class. Both retail and institution- retiring baby boomers. tage. FoHF, which before the crisis were fa- al investors seem to have realized that re- vored by high-net-worth individuals, may turns on fixed-income products do fluctu- continue to suffer. But strong multiman- ate and that there are many points of differentiation agers that have provided clear value in selection will ben- between government and corporate debt. As a result, efit from a less competitive hedge-fund environment, es- they will become more systematic in their own due dili- pecially if they did not impose redemption gates. In gence and will be better able to evaluate the skills of their addition, managed accounts are likely to be successful asset managers in the fixed-income arena. based on their liquidity, transparency, and strong risk- management profiles. Competence in selecting the under- Within traditional products, offerings focused on asset al- lying funds will be a strong differentiating factor among location will gain in importance. In retail and private managed-account providers. banking, for example, there is a greater need for superior asset-allocation expertise as a result of increasingly com- When it comes to private equity, fund raising reached plex macroeconomic trends. We believe that products an all-time high of $625 billion in 2007, only to fall to generating their alpha chiefly from asset allocation rather $550 billion in 2008. The outlook for 2009 is gloomy. In than security selection will prosper. If asset managers fact, private equity is in the midst of a perfect storm with cannot deliver on their promises in this realm, they will the bursting of the debt bubble, the drop in corporate be increasingly at risk. earnings, and the collapse of market multiples. What is more, many of the largest investors have reached their Innovative Products. Alternative investments such as private-equity limits. All of these factors will translate hedge funds and private equity may have ground to gain, into a shakeout in the sector, which could result in the de- but they will remain significant as an investment ap- mise of 20 to 40 percent of the 100 biggest leveraged-buy- proach. Still, the value of AuM in hedge funds, on the heels out private-equity firms. of the sharp decline in 2008, will likely decrease again in 2009. One factor is that positive returns since the begin- This shakeout will significantly change the shape of the ning of the year have led to considerable redemptions. private-equity landscape. Pure debt, along with multiple players, will disappear. The winners will consolidate the In our view, hedge funds will remain somewhat attractive market and lay the foundation for superior long-term re- to institutional investors, many of which will maintain turns by investing in cheap assets during the downturn. their allocation for reasons of diversification. But the in- Indeed, history demonstrates that the most advantageous dustry will grow from a smaller base, slower than it has deals are often made during tough economic times. (See historically and with a more institutional and North Amer- Exhibit 18.) Also, the winners will emerge with an even ican focus. Despite a limited recovery beginning in 2010, greater focus on operational value creation. global AuM in hedge funds is not likely to surpass its 2008 peak by the end of 2012. Increased regulation, which is Overall, we foresee a decrease in the value of private- expected, will support continued interest from institution- equity AuM from about $1.5 trillion at the end of 2008 to Conquering the Crisis 23
  26. 26. $1.3 trillion by 2012, driven by major write-downs in 2009 ◊ Absolute-Return and Short-Extension Funds. Given major (representing more than one-third of the assets). There reverses in 2008, it is questionable whether fund pro- may be a slight rebound in 2011 and 2012. In our Recov- viders can restore investor confidence in absolute-re- ery scenario, the annual growth rate for private equity turn and short-extension funds (also known as long- from 2008 through 2012 would be slightly lower than that short funds). Still, we believe there will be continued of traditional actively managed products. interest in absolute-return products that focus on asset allocation. Such products may not be the panacea that The picture is less clear for a number of products such as some have claimed them to be at times, but there is infrastructure funds, absolute-return and short-extension still room for strategies that are not constrained by funds, commodities, and real estate investments, which benchmarks. are typically considered innovative products. Many inves- tors have been disappointed by weak returns and the fact ◊ Commodities. Commodities can offer portfolio diversifi- that some innovative products turned out to be some- cation and above-average long-term growth prospects, what correlated with the market and thus unable to re- although they are still volatile. Given the continued duce portfolio risk. Still, on the retail side, innovative search for diversification, the penetration of commodi- products can help marketing efforts. Overall, the outlook ties into investment portfolios is likely to grow. for these products varies considerably. ◊ Real Estate. Real estate will remain an important asset ◊ Infrastructure Funds. These funds have offered long- class for investors. Given fears of inflation and the term stable cash flows, providing protection against in- search for diversification, this asset class is likely to of- flation and diversification. Given default risks and de- fer above-average growth prospects. clines in asset values since the crisis began, however, the picture has become less clear. Still, infrastructure Tailored Investment Solutions. Liability-driven invest- funds should show above-average growth by 2012. ment (LDI) and structured products are just two illustra- Exhibit 18. The Best Deals Are Made in Downturns Net internal rate of return1 (%) Year-on-year U.S. GDP growth (%) Downturns 5 70 60 4 50 3 40 2 30 1 20 0 10 0 –1 –10 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Internal rate of return of private-equity funds Top quartile Median Bottom quartile Sources: Preqin; The Economist Intelligence Unit. 1 Buyout funds with a focus on the U.S. market. 24 The Boston Consulting Group

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