Rebooting the global asset management industry

22 Rebooting the global asset management industry Interrelated Challenges Have Emerged on Multiple Fronts In this decade, the asset management industry has faced strong headwinds from external and internal forces, creating a winner-takes- all dynamic, the like of which has not been experienced in living memory. The result is a growing bifurcation between mega indexers with one-stop shop capabilities and small and medium-sized specialist firms that are focused on alpha generation, with a proven track record of returns and meritocratic fees. To start with, as Figure 2.1 (upper panel) shows, new net inflows have been mostly going to hyperscale players with a broad product base, privileged access to distribution channels and global reach (63%). They have capabilities across the entire waterfront of investing: active and passive; developed and emerging markets; and private and public markets. Their brand is putting these juggernauts in pole position as they attract investors from every market segment globally. Their success is powered by the rise of passive investing (61%). It is now a foundational trend that has pushed passives to the heart of the familiar core–satellite model (see Insights on the next page). Passives now account for 34% of the assets of the world’s 500 largest managers, as shown by the 2024 Thinking Ahead Institute Survey . Apart from ultra-low price, their key point of competition is how they have shed their ‘lazy investor’ image by pursuing their stewardship role to attract those interested in simple options with or without ESG overlays. However, it is unwise to write off active investing just yet. Passive funds, too, have design features that can turn their strengths into weaknesses when market conditions change. This applies mainly to cap-weighted indices. By buying in bulk, they do not discriminate between great companies and mediocre ones. They also rely on yesterday’s winners and overinflate valuations as they attract more money, as evidenced by the stellar rise of the Magnificent Seven in the S&P 500 index in 2024. This can harm the markets’ price discovery role and capital allocation. However, the current allocations to passives have not yet crossed the threshold beyond which the historic role is severely impaired. Their brand is putting these juggernauts in pole position as they attract investors from every market segment globally. Figure 2.1 What key challenges does the global asset industry currently face? Source: Citi/CREATE-Research Survey 2025 Internal % of respondents External New inflowsmostly going to hyperscale players Passive funds continuing their relentless rise Costs rising faster than revenue Rising markets driving top-line growth Alpha generation hit by shifts in policy regimes Fewer new products are surviving Fee compression is accelerating End-investors are becoming more demanding Personalization of risk raising regulatory oversight Savvy investors demanding superior client experience Rising digitalization increasing skills gaps Rising incidents of cybersecurity and ransomware 63 61 52 50 48 36 57 45 44 42 29 18 “With their set-and-forget autopilot option, passive funds require minimal governance on the part of our clients.” “Many clients have a return target of CPI plus 4%. That is only possible with active funds.” Interview Quotes