The third quarter of 2020 proved to be the strongest period on record for the investment management industry as market appreciation drove both revenue and assets under management (AUM) above the fourth quarter of 2019, the previous high watermark, according to asset management strategy consultant Casey Quirk, a Deloitte business.

Casey Quirk’s analysis of 23 standalone publicly traded traditional asset managers indicates aggregate revenue increased 1.85% while AUM rose 2.7% versus the fourth quarter of 2019. The 23 firms, based in the United States, Canada and continental Europe, had a combined $17.8 trillion in AUM and generated revenue of $14.3 billion in the third quarter of 2020.

While revenue growth rose in aggregate for the first nine months of 2020, the gap between top and bottom performers is widening. The top quartile firms generated revenue growth of 6.8% through September. Revenue at the bottom quartile firms slid 11.5% over the same period, according to the Casey Quirk analysis.

Third quarter profit margins were healthy — at 31.6% for the median firm in the Casey Quirk sample — but have been trending lower in recent years. As with revenue, there was wide dispersion in the reported margins of the firms in the Casey Quirk sample, ranging from 26.7% for the bottom quartile manager to 39.8% for the top quartile.

From @DeloitteFinSvcs' Casey Quirk group: "The third quarter of 2020 proved to be the strongest period on record for the investment management industry as market appreciation drove both revenue and assets under management…"

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— Chris Faile (@ChrisFaile) November 17, 2020

“Robust capital markets have lifted all asset management boats this year,” said Amanda Walters, a principal at Casey Quirk. “But the gap between thriving and laggard firms has widened and accelerated during this pandemic period.”

Fee compression has been widespread in recent years, and that trend also sped up amid the COVID-19 health crisis, with investors shifting assets to passive, money market and fixed income, all strategies for which asset managers charge less than they do for active equities. While median fees fell 2.4% through September, a handful of firms posted fee gains by attracting investors with differentiated high fee strategies and exploiting capacity constraints as a defense against discounting.

Costs were lower in the third quarter, largely because of the remote working environment. Total operating expense declined a median 2.9%, according to Casey Quirk. Through September, non-compensation expense fell a median 10% primarily because of lower spending on travel, entertainment, sales and marketing. That drop compared with a 1.9% decline in compensation costs over the same period.

“Market appreciation has provided a welcome respite from this year’s challenging environment and postponed difficult choices. Going forward, asset management executives will need to be more proactive about investing in their businesses while holding the line on costs,” Walters said.

Casey Quirk defines traditional asset managers as those that primarily invest in publicly traded stocks and bonds on behalf of individuals and institutions.

Casey Quirk, a business of Deloitte Consulting LLP, is a leading management consultancy that focuses solely on advising asset management firms. Casey Quirk was established in 2002 and acquired by Deloitte in June 2016. The organization has advised a majority of the 50 largest asset management organizations worldwide, including eight of the top 10. Casey Quirk provides senior leadership teams with broad business strategy reviews; investment positioning and strategy consulting; market opportunity evaluations; organizational design; ownership and incentive structuring; and transaction due diligence.

Source: Deloitte