Swiss Asset Management on the Global Stage

Swiss Asset Management on the Global Stage

Chapter 1

November 2023

Preface

Welcome to the frst piece in regular fact-based and analytically backed series of white papers dedicated to the Swiss Asset Management industry. In this opening chapter, we take a closer look at the industry's developments over the past decade to gauge the health of Swiss Asset Managers today compared to their global peers.

We underscore that this chapter serves as a foundation upon which we will build. In subsequent chapters we aim to characterize the current landscape, and cover strategy response to future scenarios

Notes to the Data

Regional totals and averages are calculated based on each manager's main country of registration. AuM refers to all AuM managed by a manager including both internal and external to its main country of registration. Total global AuM is calculated based on AuM from top 600 global asset managers plus an estimate for the remaining proportion (ca. 2.5%). Asset class mix statistics are based on 56-59% of total global AuM, depending on year. Income statement statistics such as AuM margin, revenue, profit, cost-income ratio, and AuM change metrics are captured from 102 publicly listed discretionary asset managers, including both standalone managers and collocated managers reported separately, representing 53% of global AuM in 2022. Of those, only 68 existed for the entire period from 2012 to 2022; the remainder were listed subsequent to 2012 or were acquired into private ownership. All reported values are normalized to 31 December year-end such as AuM; or normalized for last twelve months to 31 December such as revenue and profit. Some estimation is applied in a small number of metrics for specific managers where public company announcements do not provide sufficient detail for our data model. All values converted to USD using year-end conversion rates. Net profit margin (NPM) is defined as unadjusted net profit after tax from AM activities divided by gross revenue from AM activities. Further details available on request

About the Authors

About The Good Guys Company

The Good Guys Company (TGGC) is a strategy consulting house specializing in serving buy-side organizations. Headquartered in Switzerland, TGGC consists of experts with multiple years of work experience on the buy-side for leading investment managers and banks. Our dedicated team collaborates closely with a diverse portfolio of buy-side investment managers and technology and service providers throughout EMEA.

For more information on TGGC, please visit https://www.thegoodguyscompany.ch

About Lamb Quantitative Research

Lamb Quantitative Research offers an analytical perspective focused on the global Asset Management industry.

Our approach entails quantifying the industry's current state and its evolution, both on a global scale and with granular insights into individual countries and companies. We achieve this through statistical analysis of proprietary datasets as well as external time series data.

The culmination of our efforts is made accessible through a spectrum of offerings, including detailed reports, custom-tailored consulting presentations, and consulting, providing stakeholders with insights to drive informed decisions and strategic initiatives.

For more information on Lamb Quantitative Research, please visit https://www.lambqr.com

Foreword

Swiss Asset Managers’ Global Market Share Declined

In the evolving landscape of global fnance, the Swiss fnancial industry, together with its Asset & Wealth Management sectors is presumed to be strong Novel developments over the past decade, however, demand a reexamination of this presumption, and a check on the health of Swiss Asset Management, and its place on the global competitive stage.

The global industry experienced remarkable growth in assets under management (AuM) from 2012 to 2022 Switzerland participated on this global trend: Swiss Asset Manager's AuM increased by an impressive USD 1 trillion during this period, which corresponds to a 46% growth rate. Yet, in the midst of this growth, potential challenges are also present, in particular, when comparing the Swiss Asset Management industry with its North American and European peers. An initial fnding that sparked this analysis was: despite the substantial growth in Swiss AuM, the market share of Switzerland within the global landscape has contracted, slipping from 3.1% in 2012 to 2.8% in 2022. This drop of 12% compels us to refect on the global industry dynamic that predicated this change, and whether Switzerland is positioned to remain a relevant player in the years to come.

This white paper is a collaborative endeavour that draws upon our internal industry experts and leverages a strategic partnership with the quantitative research house, Lamb Quantitative Research. Together, we aim to provide a comprehensive view of the Swiss Asset Management landscape, offering an objective assessment of the current state of Swiss Asset Management in the global industry. Through this collaboration, we will set forth a list of recommendations that can help Swiss Asset Managers maintaining a strong position compared to international competitors.

We invite you to embark on this journey with us as we unravel the past, decode the present, and illuminate the path ahead for Switzerland's Asset Management industry.

Christian Cebreros

Managing partner,

TGGC

Alistair Lamb Founder, Lamb Quantitative Research

Andreas Merbecks, PhD Senior advisor, TGGC

Market Returns are the Most Important Driver for Growth. Swiss Managers Lag

The frst section of this white paper conducts a comparative analysis of AuM growth. A closer look at the three components of AuM growth: net fows, market returns, and M&A across North America, the European Union, and Switzerland to start to explain the loss of global market share of Swiss Asset Managers.

The Factors of AuM Growth

The Role of Net Infows

Swiss infows keep pace with North America, outpacing Europe. Over the past decade (2012-2022), net infows represented an impressive 30% of Swiss Asset Managers’ cumulative AuM growth. This is well above the 17% contribution net infows made to European managers’ AuM growth, and marginally exceeds the 28% contribution of net infows to North American managers growth. Swiss managers are formidable players in attracting new capital.

The Impact of Market Returns

Market returns of Swiss managers lag those of their North American counterparts, however. During the 10-year period, Swiss Asset Managers saw a modest 1% contribution to AuM growth from market returns. This is fagging signifcantly behind the 33% contribution of market returns to North American managers’ AuM growth but is robustly higher than the negative 16% AuM growth experienced by European managers. The low market returns of Swiss managers are anything but an indication of healthy managers. They are indicative of suboptimal product offerings or suboptimal asset class mix - we analyze this in more detail later in this paper.

The Quiet Role of M&A Activity

Merger and acquisition activity, while less signifcant than net fows and market returns also plays a role. For Swiss managers, M&A activity has quietly but contributed 2% to its AuM growth from 2012 to 2022. Although this fgure may appear modest in comparison to North American managers’ 9% and the European managers’ 4%, it highlights that Swiss managers need to be cognizant of the strategic role that M&A plays globally.

Sub-conclusion

When refecting on the three sources of growth, we conclude that poor market returns compared to those of North American managers is a critical factor in the Swiss managers’ loss of market share on the global stage.

Therefore, in the next step, we dive deeper into the market return factor.

Deeper into the Market Return Factor

To uncover what lies behind the poor performance of Swiss (and European) managers, we investigate two main components of market returns: 1) asset class allocation and 2) regional allocation.

Asset Class Preference: Equity vs. Fixed Income

North American managers have thrived on equity returns, harnessing the benefts of this high-return asset class. In contrast, Swiss and European counterparts have had much higher exposure to fxed income, resulting in lower volatility but also lower returns. The difference in asset class allocation set the path for returns and, in turn, the AuM growth of Asset Managers.

The 'Home Bias' Phenomenon Domestic vs. Global Investments

Swiss and European managers manifest a bias for domestic investments, which has further reduced their market returns relative to their North American peers. This is

because Swiss and European equities and fxed income have had lower returns compared to their respective North American equivalents. This 'home bias' phenomenon has implications for product offerings, client portfolio allocation, risk management, and overall AuM growth

Sub-conclusion

Both asset class allocation and home bias within each asset class have clearly detracted from Swiss asset manager’s potential AuM growth.

In the subsequent section of this white paper, we delve into the revenue landscape, exploring the historical trends and see if Swiss Asset Managers are holding up compared to their European and North American peers

Declining AuM Margins and Low Fixed Income Returns have led to Increased Focus on Alternatives

In this next section, we look down the income statement of Swiss Asset Managers, at AuM margin, revenue and proft margins, but see that some positive indicators are not across the board, rather, they reveal warning signs for traditional managers.

Linking AuM Growth and Revenue

Declining AuM Margins Worldwide

The trend is clear: AuM margins are on a consistent decline across all regions, with a global average of -3.2% per annum. The challenge of sustaining proftability while facing this persistent headwind is a shared concern among Asset Managers worldwide.

Growth in AuM Counterbalances Declining Margins

Against this backdrop of diminishing margins, the growth in AuM, as highlighted in section 1, remains a powerful counterbalance Thus, managers have still achieved revenue growth, averaging 2.5% per annum globally. This seems to indicate resilience and underscores the adaptability and resourcefulness of Asset Managers in Switzerland as well as in other regions Managers globally have had to stay focused to etch out revenue growth against the background of falling AuM margins.

AuM Margin: The Conundrum of Decreasing Returns to Scale

We point out a novel, highly relevant, structural market phenomenon resulting from and emphasising the impact of global competition. The global industry exhibits decreasing returns to scale of AuM margin The higher a manager’s AuM, the lower the AuM margin. This counterintuitive trend challenges long-held beliefs about the economies of scale in the Asset Management industry and raises important questions about strategic positioning and operational effciency.

Is this the reality for all managers? We think not. Our further analysis reveals a more diverse landscape of winners and losers. With this purpose, we turn next to look at how these metrics differ between alternative and traditional managers.

Revenues of Alternative & Traditional Asset Managers

As we analyze the global Asset Management landscape to move closer to identifying what separates winners and losers, we again observe the importance of asset classes: Asset Managers who have embraced alternative investments are reaping the benefts in the form of increased revenue growth. In addition, these managers have achieved higher AuM margins compared to their traditional counterparts.

Shifting AuM Margins for Alternatives Globally

While alternative managers have experienced a decline in AuM margin from 183 basis points (bps) in 2012 to 83 bps in 2022, these 83 bps remain far higher than the AuM margin of traditional managers, which averaged 27 bps.

Swiss Alternative Management Success and Traditional Challenges

The Swiss alternative management landscape is characterized by the existence of a single, dominant player. Other Swiss managers offer products in the alternatives space but have not enjoyed the same success with this asset class. Simultaneously, revenue growth for Swiss traditional managers is lower even than their European peers and is

effectively fat since 2012. Meanwhile revenue of North American traditional managers (like-for-like basis) has grown signifcantly.

Fixed-Income Reallocation and High-Interest Rates

The shift towards alternatives has coincided with a smaller growth rate of allocation to fxed income. This has certainly been driven in part by low and negative real returns of fxed income products, but this trend may unwind somewhat in the current high-interestrate environment.

Amid these fndings, a critical question remains: do the higher revenues in alternatives equate to higher profts?

Proftability in Alternatives

To answer the question whether alternative Asset Managers experience higher profts than their traditional counterparts, we consider the net proft margin (NPM) accounting metric. This gives an indication of the incentive over the past decade for set managers to pivot into alternatives.

Convergence of Net Proft Margins (NPM)

Historically, alternative managers have enjoyed substantially higher NPM than their traditional counterparts. However, the data reveals a curious change: NPM for alternative investments appears to be converging to the NPM of traditional managers.

Alternatives (vw) Traditional (vw)

This convergence introduces intriguing questions about the sustainability of proftability in the alternative investment sphere, and why the NPM of alternative managers has been in a signifcant downtrend over the past decade. We provide these possible hypotheses:

1. The low interest rate environment of the past decade has acted as a tailwind for alternative asset classes as investors have allocated capital into alternatives instead of fxed income, seeking higher real and non-correlated returns.

2. Higher client allocation to alternatives has increased competition in this asset class, as more managers seek to capitalize on investor demand. The increased competition in turn led to a decrease in management fee rates to make their products more attractive.

Observing a Decade in Swiss Asset Management

Our exploration of developments in the AM industry over the last decade has cast a spotlight on key trends that have defned the industry's performance and trajectory from the point-of-view of Swiss Asset Managers.

Market Share Dynamics: Switzerland's Global Position

This journey started with an observation: Swiss Asset Manager’s market share of global AuM had decreased, seeing a decline of 12% from 2012 to 2022 despite a 46% growth in AuM

AuM Growth: Balancing Act

Through an analysis of AuM growth, we unpacked the contribution of net infows, market returns, and M&A activities. Swiss Asset Managers had strong net infows, beating their European peers but trailing North American peers. Market returns emerged however as a challenging arena for Swiss managers, with a modest 1% contribution to AuM growth, in stark contrast to the robust 33% seen in North America.

Market Returns: Seeking Balance

Given market return proved to be the largest contributing factor to AuM growth, we looked at this in turn. The divergence between North American managers' preference for equities and their Swiss and European counterparts' higher allocation of fxed income caused a performance gap. Simultaneously, a home bias confated the lower market returns

Revenue Landscape: Adaptation and Opportunity

Looking next at revenue, North American managers experienced higher revenue growth than their Swiss counterparts. Swiss managers transitioned at slower pace into alternatives, even as these investments proved to be lucrative amid a low-interest-rate environment. Alternatives grew rapidly both absolutely and relatively, while fxed income allocation shrunk.

Proftability Convergence: A Shifting Paradigm

In terms of proftability, the apparent convergence of NPM of alternative managers to that of traditional managers is curious. A likely explanation is increased competition in the alternatives space. It raises important questions for managers on the future proftability of alternative products, particularly given the new interest rate environment.

Next Steps: The Uncharted Frontier

This paper, by covering the present state of the Asset Management industry, is a prelude to a longer journey. Subsequent papers will investigate the state of Asset Management industry today.