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The collapse of a built-in bull market has put more pressure on asset managers according to a new report, which will need to make "transformational changes" to enjoy the profitability and growth of years past.

Market performance has been the main driver of revenue growth for asset managers and the end of a 20-year bull run means they need to innovate in order to survive, according to a new report from Boston Consulting Group (BCG).

“The asset management industry has reached a turning point that will require rethinking the way it operates,” the BCG report says. “For much of the past two decades, accommodative central bank policies drove up equity markets. That rise, in turn, gave asset managers a major boost; in fact, market performance has been responsible for 90 per cent of the revenue growth since 2006.”

“However, we are now facing an era of higher interest rates and market uncertainties. The tide has turned, with major implications for the business model that has served the global asset management industry so well in the past.”

Passive funds continue to take market share from active managers – the share of net flows into ETFs and other products reached 90 per cent between 2010 and 2022 – while fee compression has only accelerated and costs are rising from a base “built for better times”. The bull run hasn’t been a boon for product innovation either, even as the asset management industry has become adept at “slicing and dicing products into niche offerings”.

“Such offerings have led to an abundance of products but proliferation has not meant meaningful innovation,” the BCG report says. “In fact, investors are increasingly sticking with established products with reliable track records. A whopping 75 per cent of global AUM in mutual funds and ETFs sits in products that are at least 10 years old. Meanwhile, less than 40 per cent of all products launched 10 years ago are still offered, compared with 60 per cent of all 10-year-old funds in 2010. Simply put, the current approach to product innovation is not working.”

BCG says that embracing the alternatives boom is one way back to profitability, with alternative assets expected to grow in AUM at a rate of seven per cent per annum – just behind passive investments at nine per cent. In Australia, managers like Magellan have suggested they’ll open alternatives strategies or buy established businesses to round out their offering, while new entrants to the market have outlined plans to build their own alternatives capabilities in alternatives.

But while the sudden interest in alternatives from established managers has stoked fears of a proliferation of low-quality offerings designed more to harvest fees than to generate outperformance, the BCG report notes that a number of conventional managers have successfully entered the market through one of four models: building the capability in-house; buying a firm and using a multi-affiliate or boutique structure; buying a firm and operating it independently; or developing partnerships or distribution agreements with established managers.

Irrespective of how a traditional asset manager enters the alternatives market, a consistent determinant of success revolves around autonomy,” the report says. “The highest-performing alternatives teams are kept independent of the traditional asset management business. That means incorporating an operating model that protects the autonomy, culture, and often the brand of the alternatives team.

“Seeking out cost-saving and efficiency-producing opportunities across the value chain-for example, through centralizing corporate services or integrating some middle- and back-office functions-is entirely possible, as long as the core alternatives front-office team remains detached. Multiple firms cited this as the biggest driver of success in their alternatives business and often a key criterion for closing an M&A deal.”