blog

U.S. Asset Managers Must Eventually Look Abroad For Growth

by Eric

For the last twenty years, asset managers in the U.S. have feasted on a largely positive market environment and a growing economy made up of asset accumulators (even with low savings rates). Going forward, growth will be harder to come by. Asset managers will ultimately need to look abroad for this growth.

The reasoning for this is fairly simple. Companies can only hope to increase future profits in one of four ways:
1. Squeeze more profit from existing market share
2. Steal market share from someone else
3. Capitalize on market growth
4. Find a new market
While any of these is a viable strategy, there are limitations to each that will evetnually force U.S. companies into new markets. Furthermore, these are not mutually exclusive strategies.

With a given size of markets, companies can focus on increasing efficiencies and lowering costs to maximize profits. Given the challenges of the past few years, most companies have already cut all of the costs that can be cut. Also, at a certain point, cost cuts become counterproductive, cutting into muscle as opposed to fat. You can only squeeze so much in order to maximize profits from a certain market share and revenue stream.

The next obvious step for companies is to steal market share. While this is a logical battleground, it is also a zero-sum game. The more market share one company gets, the harder gaining additional ground becomes. Therefore, diminishing returns take hold here as well.

The strategy that most companies have succeeded with in the last few decades involves riding the wave of market growth. Even with sub-optimal cost structures and a stagnant market share, profits will rise as the sheer size of the market grows. With the U.S. investing landscape dominated by solid growth, surging stock markets, and demographics skewed towards accumulators, asset managers could hardly help but make money. However, the tide may have turned. The U.S. stock market is in a downturn, the Baby Boomers are on the cusp of retirement, and economic growth has turned negative. Betting on market growth to increase future profits is a dangerous gamble.

The industry is in need of an additional theater of operations. This means that companies should look at less-developed markets, where market share gains and growth can come easier than they do in the U.S. Granted, some may choose to enter new product markets instead of new geographic ones. However, technology advances, the increasing movement of people, money, converging regulatory regimes, and huge populations in developing economies, make the case that U.S. asset managers must eventually look abroad for growth.