2022 marked a return to flat global industry profits after an auspicious but eventually temporary leap in 2021. Net profits are effectively back to 2012 levels.
Despite rising global assets under management (AuM), mean AuM margin has fallen, resulting in revenue growing slower than AuM. Costs are rising in line with revenue, causing profits to remain flat over the period: cost-to-income ratio shows no trend. In this light, the great results in 2021 were a blip on the radar, that momentarily obscured the reality for the industry.
This entrophy is not consistent across managers however. Low and negative profit growers tended to be European, or smaller, or older, or have large insurance operations; high profit growers tended to be North American, large, younger, and not dragged down by low-return insurance assets.
Despite higher AuM growth, private equity manager's profit growth was not significantly different to their traditional peers. In fact, private equity managers contributed more to industry profit in 2012 and 2013, meaning that traditional managers may even have seen some low profit growth on average.
No Change in 2023
We forecast the industry profit to remain unchanged in 2023:
Net inflows will be higher than 2022 but below trend at 1.5%, and investment return will be around 7% based on our findings on correlations explaining market return and net inflows. (See our previous post forecasting an 8.5% rise in AuM).
AuM margin will continue to decline at the rate of 3% per year to 26.5 basis points.
Costs over the last 10 years have risen 2.3% p.a., effectively in line with U.S. inflation (2.5% p.a.). For the first 5 months of 2023, inflation was closer 5%, and we extrapolate this value for the year.
This leads to an approximate 0% change in EBT, and 0% change in net profit, assuming no change in the average global tax rate.
Therefore global industry profit in 2023 is expected to be the same as 2022, with cost-to-income ratios maintaining their trendless course.
(Forecast figures are approximate only. Rounding can lead to discrepencies in totals.)
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