Cost and Growth in Asset Management

Benchmarking analysis and implications for German and Swiss asset managers

Strategy&

Executive Summary

• Our analysis shows that German and Swiss asset managers are smaller, and continue to grow more slowly than US market leaders.

• Despite a 12% growth in AuM (2017-2019) within our sample of 37 asset managers, profits have decreased by 14%.• Smaller asset managers with active business models similar to private equity companies are among the most profitable,

even at significantly higher costs per AuM.• Overall, the average CIR slightly increased from ~69% to ~70% (2017-2019).• We assessed reasons for the lower performance of German and Swiss asset managers:

– Well-known factors are the more favorable pension system and regulatory environment for US asset managers– Our data indicates that German and Swiss market structure plays a key role, which is dominated by network

monopolists with a market share of ~65%. As these captives suffer from slower growth of bank deposits and insurance premiums with banks and insurers as their primary feeders, they are not able to grow as fast as stand alone asset managers.

– In addition, network monopolist operate at a higher cost base per AuM of ~22bps compared to ~15bps for our overall sample

• We suggest levers for top line growth (Increase share of wallet; Expand the value chain; Grow with third party business) as well as cost reductions (Cost efficient sourcing; Organizational rightsizing; Joint ventures / mergers)

September 20202

Strategy&

1.703 (62%)

18. Nuveen

13. Northern Trust

5. Fidelity

15. T. Rowe

805 (68%)

7. Capital Group

1. BlackRock

767 (26%)

2. Vanguard

1.653 (127%)

3. State Street

75 (97%)

8. BNY Mellon

6. J.P. Morgan AM

11. Prudential Financial

4. Allianz

20. Axa

9. Amundi

12. Goldman Sachs AM

10. Legal & General

106. GAM

14. Invesco

16. Wellington Management17. Natixis AM

297 (27%)

19. UBS AM

21. DWS

1.837 (111%)

55. Credit Suisse AM

1.407 (181%)

5.529 (241%)

58. UnionInvestment68. DekaBank70. MEAG86. Swiss Life AM

179. LBBW174. PartnersGroup

801 (45%)

1.098 (91%)

***. Iduna1)

***. Talanx1)

2.779 (75%)

6.626 (131%)

934 (41%)

2.268 (48%)2.158 (69%)

2.108 (98%)

1.383 (46%)1.158 (106%)

1.094 (110%)

123 (46%)

981 (71%)1.079 (147%)

910 (591%)

475 (28%)368 (93%)

313 (99%)

254 (56%)

81 (45%)

132 (14%)94 (229%)

German and Swiss asset managers are smaller, and continue to grow more slowly than US market leadersGrowth of largest and selected AMs (2012 to 2017 to 2019 in €bn)

Sources: IPE Top 400 Asset Managers 2019; Strategy& analysis 1) Not included in IPE Ranking; 2) Additional AuM from 2012 to 2017; 3) Additional AuM from 2017 to 2019

AuM 2012 in €bn AuM 20172) in €bn AuM 20193) in €bn (+/- Growth)3

September 2020

Captive asset managers have grown more slowly than independent asset managers

INSIGHTS

As market leaders, BlackRock and Vanguard are in a class of their own in terms of both size and growth

German and Swiss asset managers have tended to grow significantly more slowly than the overall average

Strategy&

Amundimerges with Pioneer

1310(€bn AuM)

Ongoing mergers and acquisitions continue to drive size and growth of asset managersSelected M&A deals/joint ventures in the AM industry

Sources: PwC AWM Research Centre, Financial Times, FN London, Investment Europe, press releases of depicted companies, CitywireselectorSeptember 2020

4

July2017

August2017

InvescoacquiresSource

Standard Life merges withAberdeen

June2020

Natixiscooperates withLa Banque Postale(to combine their fixed-income and insurance-related AM businesses)

802(€bn AuM)

718(€bn AuM)

415(€bn AuM)

February2020

Franklin TempletonacquiresLegg Mason

1500($bn AuM)

Jupiter AMacquiresMerian GI

65(£bn AuM)

March2019

Brookfieldacquires (most of) Oaktree Capital

475($bn AuM)

May2019

Charles SchwabacquiresUSAA

3900($bn AuM)

October2018

Invescoacquires OppenheimerFunds

1200($bn AuM)

April2018

Hellman & FriedmanacquiresFinancial Engines

191(€bn AuM)

Strategy&

Highly profitable

Average profitable

Below average profitable

Despite a 12% growth in AuM, profits have decreased by 14%. Smaller, active asset managers are among the most profitableOutside-in Competitive Profit Benchmarking1)

1) Sample of 37 asset managers with 2019 figures 2) Also includes significant active or passive business 3) For sample included in 2017 study 4) 2018 figures for profit and costSource: Company reports; Strategy& analysis

• In comparison with our 2017 sample study of asset managers:− AuM grew by 12% − Profit decreased by 14% on

average (by €0.166 million per €bn AuM)

− Only approximately 25% of AMs were able to increase their profit per AuM, but only slightly (all below 10%)

• The most profitable AMs are small and active with business models similar to private equity companies

Small scale Mid scale Large scale

ActivePredominantly managed:

5September 2020

INSIGHTS

Avg. profitability 2017 and 20193)

Average profits

Passive

Avg. AuM 2017 and 20193)

2.01.8

1.5

2.2

2.0

0.2 2.4

2.5

6.80.0 2.61.00.4 0.6 0.8 1.41.2

1.0

12.0

0.0

0.5

1.6

Prof

it pe

r €bn

AuM

(in

€mn)

Total AuM (in €bn)

Below average profits2)

2)

2)

4)

Strategy&

30%

40%

50%

60%

70%

80%

90%

100%

0 105 5015 3020 25 35 40 45 60 65

Operating Expenses to AuM (in bps)

CIR

(in %

)A significant number of AMs have been unable to translate low OpEx into a low CIR – a focused strategy and execution neededOutside-in Competitive Cost Benchmarking1)

1) Sample of 37 asset managers with 2019 figures, 2) Also includes significant active or passive business 3) For sample included in 2017 study, 4) 2018 figures for profit and costSource: Company reports 2019; Strategy& analysis

• Low costs do not always translate into a low cost-income ratio (CIR)

• Increase of avg. CIR at decreasing avg. operating expenses (OpEx) indicate pricing/revenue challenges for AM

• Successful asset managers with active investment managementmodels are able to operate profitably with high cost and low CIR

• Effective cost management is a result of a focused strategy and diligent execution, and not necessarily a consequence of size

Passive ActivePredominantly managed:Size of bubble: small (AuM ≤ €250 bn), mid (250 €bn < AuM < €1,000 bn), large (AuM ≥ €1,000bn)

6September 2020

2)2)

2)

Avg. OpEx to AuM2017 and 20193)

Avg. CIR 2017 and 20193)

4)

Increase income Increase income and efficiency

Increase efficiency or maintain position

Maintain position

INSIGHTS

Strategy&

German and Swiss asset managers lost market share from 2012 to 2019 – they were outgrown by AMs from other countriesSum and share of AuM by region

1) Total AuM in sample of 37 asset managersSource: Strategy& analysis

September 20207

25,000

0

5,000

20,000

15,000

10,000

30,000

Total AuM

2015 20162012 2017 2018 20190%

20%

40%

60%

80%

100%

74.9%

Percent of AuM

2012 20192015 2016 2017 2018

12.2%

12.9%

78.9%

10.2%

10.9%

+50,2%

+88,6%

+51,9%

Sum of AuM by region1) Share of AuM by region1)

German Swiss Other

Strategy&

We divide asset managers into four archetypes in respect of their predominant business modelAsset manager archetypes

low

high

highValue chain integration

Scale

PURE SCALE PLAYER

PRODUCT INNOVATOR

VALUE CHAININTE-

GRATOR

2

• Niche, innovative product positioning• Strong brand centered on investment

capabilities• Prominent “star” fund manager

• Aggressive extension of existing businesses into additional, profitable parts of value chain

• Either front-to-back, back-to-front or across sectors

• Captive, part of FS network/group and thus have close relationship with specific clients

• Product offering tailored to target client segment, broad enough to keep competitors out

• Holistic offering and coverage coupled with relatively low costs

• Standardization and operational excellence• Leverage global platforms

Scale Play

Specialization focus

8September 2020

1 12

PURE SCALE PLAYER

VALUE CHAIN INTEGRATOR

3NETWORK MONOPOLIST

4PRODUCT INNOVATOR

4

Source: Strategy& analysis

Illustrative

Strategy&

Types of AM from DE/CH2)

Network monopolists have grown at slowest rate and lost market shareSum and share of AuM per AM-archetype

1) Total AuM in sample of 37 asset managers 2) Of asset managers in sampleSource: Strategy& analysis

September 20209

0

5,000

10,000

15,000

30,000

25,000

20,000

Total AuM

2012 20182015 2016 2017 2019

6,5% 6,1%

27,5% 21,8%

39,2% 44,0%

26,8% 28,1%

0%

20%

40%

60%

80%

100%

201820172012

Percent of AuM

2015 2016 2019

Product InnovatorPure Scale Player Network MonopolistValue Chain Integrator

+42%+68%

+102%

+89%

26%

65%

9%0%

Types of AM from DE/CH2)

100%

Sum of AuM per AM-archetype1) Share of AuM per AM-archetype1)

Strategy&

Public pension scheme, regulatory environment and market characteristics slow growth in Germany and SwitzerlandReasons for slower growth in DE/CH

10

Public pensions still dominate income of newly retired pensioners:• ~63% in Germany• ~50% in SwitzerlandThe corresponding funding is pay-as-you-go basedThis means fewer inflows and accumulation of capital for asset managers compared to countries with purely fund-based systemsUtilization of corporate pension schemes in Germany with no significant growth over the last years

REGULATORY ENVIRONMENT

Heavily regulated market: Since 2016, the number of regulation initiatives have almost doubled (incl. MiFID II, Priips, GDPR):• Number of regulations grew from 39 to 72• Number of implementation rules grew from

305 to 537• Number of guidelines grew from 232 to 455This carries the risk in the EU of:• Higher cost for asset managers• Lower margins• Accelerating market consolidation• Difficulties in producing high, sustained

growth

MARKET CHARACTERISTICS

• High number of network monopolists in Germany and Switzerland

• Market characteristics have led to higherbarriers for market entry, reducing pressure on market participants to grow

• Network monopolists have grown at a much slower rate (avg. of CAGR 11% vs. global leaders with a CAGR of >40%)

• Given the increasing gap vis-a-vis the global market, the risk increases that clients will question products and pricing

Sources: BMAS Alterssicherungsbericht 2016; Bundesamt für Statistik Schweiz, Neurentenstatistik; Source: https://www.funds-europe.com/news/eu-funds-regulation-a-guide-for-us-asset-managers; BVI yearbook 2019; Strategy& analysis

PUBLIC PENSION SCHEME

September 2020

Strategy&

243

Pts.

333

Pts.

2012

15.4

2018

23.1

Network monopolists suffer from slower growth of bank deposits and insurance premiums as their primary feedersIndustry growth comparison – for Europe

1) Sample of 11 European Network MonopolistsSource: Ceicdata, Statista, EFAMA, insuranceeurope.eu, Strategy& analysis

September 202011

(AuM in trillion Euros)

Overall, European asset managers grow faster than banks and insurers. Growth of network monopolist, being linked to slower feeder growth, is only half as fast as the asset management industry overall

+50%2012 2018

1,311

1,071

+22%

11.5

2012 2018

10.5

+9%

Growth of feeders

Asset Managers

(Total deposits in trillion Euros)

Banks

(Gross written prem. in billion Euros)

Insurers

2.5

2012 2018

3.1

(AuM in trillion Euros)

+24%

Network Monopolists1)

+37%Stoxx

EuropeTotal

MarketIndex

Strategy&

Contribution of asset management to pre-tax profits (2019)

With increasing importance attached to their feeders, network monopolists will be under pressure to perform at market levelContributions to pre-tax profits and cost per AuM

1) Weighted average cost (weighted by AuM) per AuM in BPS, subset (23) of 37 asset managers in sample, for which OpEx from 2015-2019 are publicly available; 2) Asset management profits relative to total pre-tax profits of business segments with positive profit contribution (Corporate Bank, Investment Bank, Asset Management) 3) Also includes wealth management profits; Sources: Bloomberg, annual reports, Strategy& Analysis

September 202012

2015 2016 2017 2018 2019

16

0

18

14

20

22

24

26

-12%

-14%

-15%

• Significant, increasing relative contributions to pre-tax profits• Increasing importance of asset management for banks and

insurance companies

• Average cost1) per AuM for network monopolists significantly higher than market average

• In addition, network monopolists’ costs are decreasing more slowly than market average and those of scale players

45%44%

37%24%

11%9%8%

7%6%

3%

Credit Suisse

UBS

Deutsche Bank2)

BNP Paribas3)

Natixis3)

Allianz

Goldman Sachs

JP Morgan3)

La Banque Postale

Aviva

Network monopolists

Overall average of sample

Scale players and value chain integrators

Average1) cost per AuM in BPS for AM archetypes

Strategy&

Strategies for German and Swiss asset managers to improve competitive position and cost per AuMStrategic levers (1/2) – top-line (non-exhaustive)

Source: Strategy& analysisSeptember 2020

13

GROW WITH THIRD-PARTY BUSINESS• Increase third-party business of network monopolist as prominent AM operating model in

Germany/Switzerland (e.g. strengthening sales unit, open platform)• Target new sales partnerships• Integrate into open platforms/marketplaces to increase reach of product offering• Further digitize distribution

INCREASE SHARE OF WALLETAchieve a higher share of wallet with already existing partners by e.g. extending service/ product portfolio for existing clients

EXPAND VALUE CHAINExpand offering along the AM value chain to become less dependent on AuM-based fee models, and to strengthen integration with clients and therefore defend own market position

Strategy&

Strategies for German and Swiss asset managers to improve competitive position and cost per AuMStrategic levers (2/2) – bottom-line (non-exhaustive)

Source: Strategy& analysisSeptember 2020

14

COST-EFFICIENT SOURCING• (Re-)Consider make/buy (outsourcing) along complete value chain• Focus on differentiating capabilities, adding extra value for your clients

JOINT VENTURES/MERGERS• Identify joint ventures/merger opportunities to realize cost synergies and increase scale

effects• Network monopolists: Consider deeper integration to leverage cost synergies

ORGANIZATIONAL RIGHTSIZING• Evaluate current organizational size as well as distribution of workforce compared to other

market participants, and potentially resize • Continue to be aware of further COVID-19 impact on markets and prepare for a variable cost

base and organizational flexibility

Strategy&

To achieve respective cost aspirations, each archetype can deploy specific levers for value creation Levers for value creation and cost aspiration per archetype

Niche, innovative product positioning with strong brand

Extension of existing platforms, either F2B or B2F, for seamless value chain coverage

Close relationship to target clients by being part of the same network/group

Holistic offering and coverage coupled with relatively low costs

Cost aspiration (OpEx to AuM)

15September 2020

Pure Scale Player Product InnovatorNetwork MonopolistValue Chain Innovator1 2 3 4

Portfolio rationalization Assess capabilitiesAssess capabilitiesChoice of business portfolio and capabilities(“WHAT”)

Organization and locations(“WHERE”)

Operational excellence(“HOW”)

Operating model design Footprint optimizationMake or buy

Supply management Supply managementOrganizational right-sizing

Make or buy

Footprint optimization

IT leverage Process excellenceProcess excellence

Way of workingProcess excellence

IT leverage

< 10 bps ~ 10 - 15 bps < 7 bps ~ 10 - 60 bps(wide variety of business models)

Levers for Value Creation

Source: Strategy& analysis

Assess capabilities

Strategy&Strategy& 16

Your Strategy& contacts

Dr. Philipp WackerbeckPartner, Head of Financial

Services Europe

+49 170 2238 659

philipp.wackerbeck@strategyand.de.pwc.com

Dr. Torsten EistertPartner, Head of FFG

Program Europe

+49 160 9318 6903

torsten.eistert@strategyand.de.pwc.com

Dr. Utz HelmuthDirector, Strategy& Head Asset Management GSA

+41 77 409 4571

utz.helmuth@strategyand.ch.pwc.com

September 2020

Thank you

strategyand.pwc.com

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