Assets under management in the Middle East increased by $100 billion to $1.3 trillion in 2022 despite global macroeconomic headwinds, management consultancy Boston Consulting Group has said.
The region's 7 per cent annual growth last year bucked the global trend in which AUMs fell 10 per cent to $98 trillion, BCG said in its Global Asset Management 2023: The Tide Has Turned report.
Examining the external and internal pressures shaping the industry, the report pressed upon asset managers to transform their businesses in an era of “market uncertainties, fee compression, rising costs and technological change”.
“While performing relatively better than their European and American peers, the asset management industry in the Middle East has arrived at a critical juncture, compelling leaders to reassess their organisations' operations to regain the profit growth they experienced in the previous years,” said Markus Massi, managing director and senior partner at BCG.
“In fact, since 2006, 90 per cent of revenue growth came from market performance, and in an environment where this is no longer guaranteed, it is now time for a real transformation.”
Last year was among the worst for investor returns since the global financial crisis in 2008 but markets are expected to recover as the economic headwinds subside.
However, central banks, which kept interest rates near record lows to stimulate economies and financial markets during the Covid-19 pandemic, are “no longer engineering sustained market appreciation” and this has affected the global asset management industry.
“Their goals for the short term are the exact opposite; they are trying to slow growth to combat inflation, which will have an impact, especially on equity markets,” Mr Massi said.
“However, for the Middle East, the growth outlook is more positive, driven by continued higher oil income and comparatively positive equity market developments.”
Given the existing pressures and market expectations, BCG estimates annual profit growth at about 5 per cent, half the industry average in recent years, if global asset managers stay the course until the end of the year.
To return to historical levels, asset managers will need to cut costs by 20 per cent overall and shift their revenue mix to generate at least 30 per cent of their turnover from higher-margin products.
Asset managers should transform their approach to profitability and should pursue alternative investments and private market opportunities.
“Firms aiming to enter the alternative market can do so through four primary pathways – build in-house, buy multiple firms and use an affiliate or boutique structure, buy an alternative firm and operate it independently or establish partnerships,” the report said.
“This is particularly applicable for Middle Eastern asset managers, given the high preference of regional investors for private assets and the lack of other alternative investment instruments.”
Asset managers should also harness technology that will help them to create personalised client experiences and products to distinguish themselves from the competition.
“Organisations should evaluate and optimise costs across the full value chain and really focus on what makes them stand out,” said BCG principal Farouk El Hosni.
“Going forward, the only choice is change.”
