Global assets under management have risen, yet asset managers are still struggling to earn a profit, according to a report from Boston Consulting Group.

The consulting firm's eighth annual report on the industry said professionally managed assets, driven primarily by rebounding equity markets, grew 12% last year, to $52.6 trillion, versus a decline of 17% a year earlier. About 1% of the growth came from net inflows.

Net revenues declined by 11% despite the rise in assets. Asset managers were able to reduce overall costs by an average of 7%, but operating margins tumbled 19% last year, according to the report.

"A higher share of lower-margin products, pressure on prices and structural cost increases will make it difficult to regain peak historical profitability levels," Kai Kramer, a partner at Boston Consulting Group and leader of its global asset management practice, said in a July 20 press release.

Alois Pirker, research director at Aite Group in Boston, said, "For asset managers to turn a profit requires that people are keen to invest and take advantage of investing strategies, but it still hasn't panned out that way."

"In the fourth quarter of last year and first quarter of this year, things were looking up," he said, "and now it's turned cautious again, and investors are sitting on the sidelines."

Pirker continued: "The second quarter has been a tough time for asset managers to tell a compelling enough story to get investors to go back into the market. It takes a few quarters for investors to regain confidence."

The bullish news is that higher volumes of assets under management are expected, along with a better product mix, which could bolster average profit margins.

The report also examined some trends in the asset management industry. It found bigger differences among asset managers in terms of revenues, costs and profits during 2009.

Though two-thirds of asset managers managed to reduce overall costs, less than 20% of them increased their profitability.

Profits became more concentrated as investors put their money into the biggest and most trusted companies.

The top 20% of asset managers, as measured by net inflows, attracted 88% of net sales last year but held 23% of assets under management — and 37% of asset managers reported outflows.

Meanwhile, investors continued to demand more from their asset managers. Investors are scrutinizing asset managers more and asking questions about risk management, transparency and overall service.

The report said one trend favors more passively managed products, which put a squeeze on traditional, actively managed products.

The trend toward emerging markets will continue, though emerging markets' share of global assets under management and revenue pools will remain relatively constant during the next few years, the report said.

Nonetheless, emerging markets will probably generate more than 25% of net sales from 2010 through 2014.

If asset managers are to gain trust and recruit and retain investors, they must cut costs and maintain focus on target markets and distribution. More opportunities will arise for mergers and acquisitions both nationally and internationally, and new partnerships are also a possibility.

"Whether we're talking about fast-growing Asian markets, for example, or retirement markets in mature economies, opportunities still abound for asset managers," Kramer said.

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