Asset management sector sees wealth base grow but profits dip

Despite global economic headwinds, the Middle East’s asset management industry has grown by $100 billion to over $1.3 trillion, according to a report by Boston Consulting Group.

In its ‘Global Asset Management 2023’ study, Boston Consulting Group explores the developments in the global asset management landscape, finding that global wealth has fallen by 4% in 2022 to $255 trillion – in what is the first drop in wealth since the 2008 global financial crisis.

The Middle East however managed to buck the global trend, with wealth up by $100 billion, on the back of a compound annual growth rate of 7 percent.

The drop in financial wealth was worst felt in North America, where financial assets tumbled by 8.1% over the course of 2022. Assets in Western Europe also endured a torrid 2022, sinking by 2.8%. The war in Ukraine, and sanctions against oligarchs linked to the government of Vladimir Putin, resulted in an exodus of wealth from the region.

Across all regions, a chaotic 2022 for stocks and shares was the main factor leading to lower wealth.

Michael Kahlich, a managing director and partner at Boston Consulting Group, said that an improving macroeconomic outlook and rebound in stock markets will likely mean that total wealth will rebound this year. There remain several risks though which may reverse the outlook, including the current Israel-Palestine war unfolding in the Middle East.

Restoring profitability

Boston Consulting Group’s report also found that levels of profitability are dipping in the asset management sector. Given the existing pressures and market expectations, global asset managers’ annual profit growth will close the year at around half the industry average of recent years.

“This is compelling leaders to reassess their organizations’ operations to regain the profit growth they experienced in the previous years,” said Markus Massi, managing director and senior partner at Boston Consulting Group.

The report suggested that in order to return to historical levels, asset managers will need to slash costs by 20 percent overall and shift their revenue mix to generate at least 30 percent of their revenue from higher-margin products.

Given the high preference of regional investors for private assets and the lack of other alternative investment instruments, asset managers in the Middle East should pursue private market opportunities.

Furthermore, in comparison to traditional approaches, innovative technologies can boost personalization efficiency and effectiveness in the sales and marketing process, thereby leading to a surge of about 20 percent in sales conversions, the report highlighted.

“In an environment where growth is no longer guaranteed, where fees are being compressed, and where passive investing is increasingly popular, the Middle East’s asset management industry is facing a crucial turning point,” stated Farouk El-Hosni, a principal at Boston Consulting Group.