The asset management industry is undergoing a structural transformation, marked by increasing consolidation and an evolving product landscape. While consolidation is not a new phenomenon, recent years have seen it accelerate, particularly as a small number of global giants continue to capture disproportionate inflows. The way Morningstar researchers Germaine Share and Samuel Lo see it, the industry is becoming top-heavy, with firms like Vanguard and BlackRock commanding outsized market shares, largely thanks to the continued popularity of passive investing.
This concentration at the top is reshaping the dynamics of competition, product development and distribution. For investors and wealth managers alike, the implications are wide-ranging, from lower fees and broader product access to concerns around limited diversity in investment philosophies and strategies, according to Morningstar.
Vanguard and BlackRock are emblematic of the consolidation trend. Together, they account for a significant share of global assets under management (AUM), driven primarily by their scale in passive fund offerings. These firms have grown their AUM not only by attracting flows from retail and institutional investors but also by leveraging their operational scale to offer some of the lowest fees in the market.
With the average expense ratio of index-tracking exchange traded funds (ETFs) dropping to single-digit basis points, smaller managers face mounting pressure to remain competitive. The economics of scale work in favour of the largest players. Larger firms can spread fixed costs, such as compliance, technology infrastructure and research, across a much bigger base, enabling them to maintain profitability even at low margins.
“The large asset managers can spread their costs over their larger asset bases and have more room to lower expense ratios for investors, giving them a leg up against the fierce and persistent fee pressure in the industry,” say Share and Lo.
This cost advantage is a critical differentiator in an environment where investors are increasingly fee-conscious. As more money flows into passive products, smaller managers are being squeezed out or forced to differentiate through niche offerings or specialised strategies.
See also: How to value asset management firms
“Fee pressure is particularly strong in markets where passive funds are more prevalent, such as the US, where the average expense ratio paid by fund investors halved over the past two decades. Indeed, some asset managers like Invesco have tried to achieve scale through mergers and acquisitions,” they add.
Dog eat dog world
Fee pressure is not new, but it has become more pronounced. Across the board, asset managers have been cutting fees in response to investor demand for cost efficiency. Passive funds, particularly ETFs, have benefited the most. In many markets, passive strategies now dominate net flows, with investors favouring the transparency, liquidity and low cost of index-tracking products.
See also: CapitaLand Investment’s dynamic growth proposition
This has created a challenging environment for active managers. While some firms continue to demonstrate strong performance in select segments, the broader trend favours scale and efficiency. The result is a polarised industry: a handful of mega-managers controlling the lion’s share of flows, while many mid-sized and boutique players fight to maintain relevance.
This dynamic is prompting firms to explore strategic M&A. By acquiring competitors, asset managers can grow AUM, gain access to new distribution channels, or acquire new investment capabilities, especially in specialised areas that would take time and resources to develop in-house.
“Asset managers can also readily gain access to existing investment capabilities or distribution channels through M&A, both of which can bring a new client base. This is particularly advantageous when it comes to specialised areas, where it may be more time-consuming and difficult to build a new in-house capability. Franklin Templeton and BlackRock have both been on buying sprees to grow their alternatives businesses,” note the researchers.
Beyond cost synergies, acquisitions can provide a foothold in growing market segments. Alternatives, in particular, are a key focus. Morningstar noted that Franklin Templeton and BlackRock have both made high-profile acquisitions to expand their offerings in private markets, infrastructure and real estate — segments that are increasingly in demand from institutional and high-net-worth clients seeking diversification and higher returns.
M&A also allows firms to enter new geographical markets or client segments more quickly than organic growth would allow. For instance, gaining access to an established retail distribution network in Asia or acquiring an alternatives manager with institutional relationships in Europe can be significantly more efficient than building from scratch.
However, M&A is not without risks. Integration challenges are common, especially in a people-centric industry where investment philosophy and culture play a key role. Talent retention post-acquisition is often a major hurdle. If key portfolio managers or client relationship leads exit following a deal, the acquired firm’s value proposition can quickly deteriorate.
“While the objectives and potential benefits for asset managers to engage in M&A are clear, achieving them is often easier said than done. There could be various integration challenges, especially pertaining to investment culture and talent retention, given the people-centric nature of asset management,” say the Morningstar researchers.
For more stories about where money flows, click here for Capital Section
Moreover, aligning operating models, IT systems and compliance frameworks across different organisations can be time-consuming and costly. As such, while the potential upside of M&A is considerable, successful execution remains the exception rather than the rule.
Local Asian trend
In Asia, global asset managers are increasingly turning their attention to local markets. Rising wealth, regulatory liberalisation and a growing appetite for sophisticated investment products are making the region an important battleground for asset managers seeking growth.
Product innovation is one area of focus. Some firms are repurposing existing products, such as active ETFs developed in the US or Europe, for Asian investors. Others are exploring semi-liquid structures that combine the benefits of private asset exposure with more flexible redemption features. These are gaining traction particularly among private banks and family offices looking to offer differentiated solutions.
In Singapore and Hong Kong, regulators have been supportive of these trends, introducing frameworks to facilitate cross-border fund distribution and enhance market access. As a result, investors in Asia now have access to a wider range of global strategies, and asset managers are responding with localised product offerings.
For wealth managers, this expanding product universe presents both opportunities and challenges. On one hand, it enables more tailored solutions for clients; on the other, it increases the complexity of product selection and due diligence. Understanding the nuances of different fund structures, underlying exposures and fee models becomes crucial.
Share and Lo are expecting more product diversification in the horizon. “Asset managers in Asia have also begun to tap into this trend, with some global asset managers bringing existing active ETF products to Asia. At the same time, semi-liquid, open-end funds that invest in private assets are also becoming more available, notably via private banking channels,” they add.
