by Philip Haddon on Jul 09, 2010 at 00:01

A report from consultant McKinsey & Company shows that despite fund managers in Europe seeing a 12% rise in their assets in 2009, profitability sunk to a new low.

The industry’s profit pool fell to €6.4 billion in 2009, close to half its 2007 level of €11.9 billion.

The report from McKinsey put declining net revenues down to radical changes in investor demand.

‘The decline in revenue margins resulted mainly from a shift toward lower-margin products and asset classes as well as increased pressure on pricing (overcompensating the increase in performance fees). The trend toward passively managed products accelerated the average decline of fees,’ the report said.

The analysis was based on McKinsey’s annual survey of fund managers worldwide with assets under management of some €17 trillion. 106 European asset managers participated in the survey, accounting for some €6 trillion in assets under management.

The report says firms will have to get used to, and adjust to, a new normal for asset managers.

‘The crisis has significantly lowered industry profitability. While AuM levels are recovering steadily, profitability will remain significantly below 2007 levels, driven by more defensive product mix, lower prices, and pressure from distributors that demand a higher share of the pie in providing shelf space,’ said Pierre-Ignace Bernard, a director at McKinsey and leader of the firm’s European Asset Management Practice.

‘While profitability will recover in 2010, we don’t expect it to return to precrisis levels any time soon. The ‘new normal’ environment is tougher for asset managers, stressing the need for individual players to relentlessly work on their competitive position,’ Bernard said.

In order to stand a chance of returning profitability to pre-crisis levels, the report recommends fund managers focus on perceiving regulation as an opportunity, being on the forefronjt of innovation, and upgrading sales efforts and customer insight.