Greater adoption of low-cost passive products such as ETFs has compressed European asset manager profit margins in recent years, with profitability set to fall further, according to a recent study from German strategy advisor zeb Consulting.
Revenues as a percent of assets under management (AUM), or revenue margins – which can be understood as an industry-wide total expense ratio (TER) – fell to 27.5bps in 2023 from 29.7bps in 2019, a 7% drop, as passive funds continued to enjoy strong demand.
Dr Carsten Wittrock, partner at zeb Consulting, said: “Passively managed assets remain attractive."
“They are ideal for implementing asset allocation which provides the biggest risk-adjusted return contribution to a portfolio anyway. This is confirmed by the continuously high demand.”
Although costs also decreased over the period, they failed to keep pace with falling revenues. This was felt on asset manager bottom lines, with profit margins dropping from 9.9bps in 2019 to 8.2bps in 2023 – a tumble of around 17%.
The trend looks set to continue going forward, according to zeb. In its ‘base case’ modelling, revenue margins will decrease to 22.2bps in 2028, a 20% fall, while profit margins will collapse to 5.5bps, a drop of 33%.
Profit margins could rise 11% in the best-case scenario and fall 52% in the worst.
“Our simulation suggests reduced profit margins for asset managers. Only in the best-case scenario – including significant AUM growth, rising earnings and unchanged costs – would an improvement be conceivable,” said Manuel Hobisch, senior manager at zeb Consulting.
The findings follow a recent study from data and analytics firm Broadridge, which concluded that passive ETF fees could fall in Europe over the coming years, particularly if the Retail Investment Strategy proposal passes into EU law.
