survey of european asset management industry finds across-the-board growth of 9% to e7.4 trillion
The UK has the highest fund management costs in Europe but is also the least profitable, according to research from McKinsey & Company.
Despite generating high levels of revenue, inflows to the UK fund industry were negated by very high costs as well as a high share of institutional clients.
In its seventh annual survey of the economics of the European asset management industry, McKinsey said that while the gap between the most and least profitable country in the region narrowed in 2004, average profitability rose by 9% to 13.9 basis points.
In terms of growth, across Europe assets grew by 9% to e7.4trillion in 2004 though only a third of this could be attributed to net inflows of new money with the rest resulting from performance.
Martin Huber, who headed the survey team, said: "Scandinavia and the UK enjoyed the highest overall growth rates and that was driven by the strong performance effect which was due to their high share of equity.
"These markets were also the top performers for both retail and institutional growth."
Throughout the Continent, while institutional growth was maintained in double-digit figures, retail growth fell from 12% in 2003 to 7% in 2004.
Huber said: "The trend towards lower-risk products continued and, while non-traditional products gained ground with institutional customers, retail customers were cautious."
He added that persistent risk aversion from retail customers remains one of the underlying challenges facing the industry along with the rising costs of compliance and risk management requirements.
With the rise in revenues reflecting an overall stability in the market, with respect to pricing and product mix, Huber said asset managers need to focus on differentiating themselves from each other in order to achieve real value.
"In this resilient environment, there is still a lot of room for asset managers to develop distinctiveness," he said. "As traditional boundaries shift, asset managers will need to answer some bold questions if they are to realise their aspirations and seize the opportunities."
In particular, he said managers have to assess their performance in order to identify their areas of strength and weakness.
Firms should also look to build a strongly branded proposition and make a decision either to become a platform-style service provider or bypass that proposition and outsource, according to the report.
Andrew Doman, a director in McKinsey's European asset management practice, said: "We see many large players being unpicked by specialists, and hedge funds are luring away the best staff.
"Players with no clearly differentiated strategy will be stuck in the middle, facing some difficult choices. Those who fail to strengthen their brand - and make it mean something really distinctive to customers - risk ending up as little more than back-office product suppliers unable to generate serious profits."
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