Europe's asset management industry chalked up record operating profits of €16 billion last year, finally overhauling the previous record of €15.4 billion set in 2000 at the height of the dotcom boom.
Costs are rising sharply though, as star portfolio managers grab a larger share of the pot for themselves, and the industry may need to prepare itself for a downturn, warns McKinsey & Co in its annual survey of the European asset management industry.
McKinsey described 2006 as a year of "solid growth" for European asset managers, with assets under management rising 12 per cent, although this was down on the 18 per cent recorded in 2005 and the 17 per cent witnessed in McKinsey's survey of the US.
Two-thirds of the gains came from market performance rather than net inflows. This asset growth helped push up aggregate operating profits by 20 per cent to €16 billion, a marked improvement on the €6 billion recorded in the dark days of 2002.
However, the fact that assets under management have risen from €6,700 billion to €10,000 billion since 2000 indicates how profit margins have been squeezed by a rising cost base.
"This is an industry that, while it has recovered its absolute profitability and is still an attractive business to be in, has trended consistently down to lower levels of profitability per assets under management," said Andrew Doman, director in McKinsey's European Asset Management Practice.
"We are concerned that the industry is not really thinking about its cost structure. It is structurally becoming less profitable from a shareholder point of view."
In particular, portfolio managers are pocketing more of the returns. Expenditure on middle and back-office operations, IT and support has not risen since 1999, when McKinsey conducted its first survey, as a proportion of assets under management.
Sales and marketing spend has edged up, from 3.5 basis points of assets under management to 4.4 points. However, the slice of the cake taken by portfolio managers has surged from 4.3 basis points to 6.7 points, or from €2.5 billion to €6.4 billion.
Mr Doman attributed this to the greater bargaining power of the select band of portfolio managers who can consistently generate alpha, or above-market, returns, or at least create the impression they can. In particular, traditional asset managers are having to compete for talent with hedge funds.
"Scarcity of alpha has led to portfolio managers being able to ask more or less what they want, leading to increasing capture of compensation by managers. We are worried about portfolio managers retaining more of the added value themselves," he said.
"We are seeing more and more companies moving towards a boutique or multiboutique model, all of which casts light on the managers; they become the heroes. The star culture, which we had got away from since the 1990s, has come back strongly."
