Global assets under management (AUM) will continue to grow for the foreseeable future, but so will pressure on profit margins, according to Cerulli Associates’ latest report, “Global Markets 2019: Bringing Clarity to an Uncertain World.” In light of the ongoing pressure to lower fees, asset management firms will seek out new markets, product offerings and investment capabilities. In addition, asset management firms that operate around the world are paying more attention to China, India, Latin America and the Netherlands, where they see the greatest opportunities for retail growth.

“Decisionmakers in the asset management industry are having to weigh a wide variety of factors, including regulation, fee compression, persistently low yields, and political and economic uncertainty,” says André Schnurrenberger, managing director, Europe, at Cerulli. “In addition, we are increasingly seeing regulators seeking to promote investment, particularly saving for retirement, and several countries have introduced legislation that seeks to make the industry more transparent and user-friendly.” Further, asset managers are grappling with mounting market volatility.

To improve client service, many asset managers now use artificial intelligence (AI), machine learning and big data. In addition, advances in robo-advice and passive investing continue to reshape the fund management landscape, widening access to investment services, the report says.

In many of the regions, environmental, social and governance (ESG) investing is gaining traction. “We are bullish on the long-term prospects of success when it comes to ESG integration and see shifting demographics and the impending intergenerational wealth transfer as causes for optimism,” says Justina Deveikyte, associate director, European international research at Cerulli. “Investors under age 40 prefer strategies that incorporate ESG, and many investment platforms are recording an increasing number of searches for ESG solutions.”

Cerulli says that investors need to be better educated about ESG investing but that asset managers will be well-served if they actively market this investment choice.

ESG is particularly trending in France, where 56% of asset managers expect fast growth in the category’s assets. Another 39% expect moderate growth. The outlook for ESG investing is also bullish in the UK, where 32% of asset managers expect fast growth and 42%, moderate growth.

Several governments in the Pacific Rim are taking the lead on ESG investing, Cerulli says. Hong Kong’s Securities and Futures Commission plans to launch a website by the end of the year that identifies green or ESG funds, for investors. Japan’s Government Pension Investment Fund invests according to ESG principles and requires outside managers to apply those principles to their equity investments. Taiwan’s Bureau of Labor funds launched its maiden domestic ESG equity mandate last year, worth U.S.$1.3 billion.

In addition, Cerulli expects that equity and bond funds will gradually lose market share to alternative and balanced funds over the next five years. In the U.S. retail sector, aging demographics are creating an interest in products that protect assets—e.g., annuities—and asset managers are looking into how to leverage solutions developed for the institutional channel, such as pension liability matching, for retail clients.

In the U.S., only four of the 20 largest fund managers were able to increase their assets last year. Cerulli attributes this to poor market conditions, net outflows and the commoditization of products. Cerulli says, to reverse this trend, asset managers will need to find new ways to differentiate themselves. Giants such as BlackRock and Vanguard are experimenting with free models, designed to attract assets and strengthen relationships with key distribution partners.

In conclusion, Cerulli says, “asset managers need to keep adapting in order to limit the impact of rising costs and fee compression. Many are considering disruptive revenue and compression models, cutting costs and focusing on broad value-add services that tap different revenue streams. Product innovation is another important area, and firms should investigate ways to improve operational efficiencies through better use of technology.”