Asset managers face 30% profit cut amid passive threat, warns McKinsey

market investment chartProfits at asset management companies are set to drop by 30 per cent in the next three years as the threat of passive investing and market uncertainty rises, a report warns.

The study by consultancy firm McKinsey says profits are set to drop by between 30 and 35 per cent for investment managers globally by 2018 unless more is done to cut costs.

The drop is mainly attributed to market volatility in emerging markets and the low oil price, McKinsey says.

The report warns that earnings have already been declining in the first quarter of this year especially in Europe which has seen €16bn (£12.6bn) in net investment redemptions, marking the largest outflows since the financial crisis of 2008.

This year also marks a significant drop on the €216bn of net inflows recorded during 2015.

Net flows appear more significant in multi-asset and passive products than active equity in the years between 2009 and 2015.

In particular, multi-asset and passive equity funds gathered almost €500bn and €350bn in the period respectively, compared with €110bn in active equity products.

“The tide has turned. 2016 will be a very challenging year,” says Philipp Koch, head of European asset management at McKinsey. “Profits have already declined 10 per cent in the first quarter [compared with the final three months of 2015].

“A lot of players simply hope to preserve what they have for as long as possible. But it is a different environment that they are now operating in.”