Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

To see the future of fund management, look at the the auto industry.

Large-scale producers (the equivalent of Ford Motor Co. or Volkswagen AG) will dominate the landscape, driving inefficient players out of business or absorbing them. Niche players (Ferrari NV, arguably Tesla Inc.) will charge more for specialist products, sometimes in alliance with the bigger players. Those in the middle face extinction.

The Boston Consulting Group's latest report on asset management only adds to this dismal outlook for many firms. The solutions the management consultant proposes -- milking those cash cows among them -- are easier said than done.

The industry suffered a decline in revenue and profits in 2016, the first time that's happened since the financial crisis of 2008, as my Bloomberg News colleague Ivan Levingston reports. While rising markets boosted assets under management, net inflows remained lackluster and fees are under pressure.

The BCG study, published on Tuesday, highlights the growth in passive strategies and the corresponding decline in assets under active management. Part of the problem is the paltry revenue that passive investments deliver; while the investment class is forecast to climb to a fifth of assets under management by 2021, it will account for only 7 percent of total revenue, the study says.

So how should the industry respond to the bleak outlook? Investment stars, the strategies that differentiate an asset manager from its peers, "should be allotted the greatest investments and resources," the report says. Established cash cows should be run as efficiently as possible and milked hard, while "dogs" with declining inflows should be ditched if they can't be reinvented.

If only it were that easy. Squeezing costs out of the existing core businesses is increasingly difficult; while net revenue as a share of assets under management dropped by almost 5 percent in the year to 2016, costs declined by less than 3 percent on the same basis:

Product life-cycles are shortening, requiring asset managers to spend more on innovation and product launches to maintain growth. Moreover, technological advances require relentless investment; and the growing demands of clients and regulators also militate for higher costs.

What's clear is that the industry is bifurcating between the largest players players, those with passive or diversified funds, and the smaller niche players. The middle is being hollowed out.

The Squeezed Middle
"Midsized players are stuck in the middle with squeezed profits."
Source: BCG

Consolidation is one potential solution. The number of global mergers has increased by almost a third in the past five years; in the past three years, BCG says five deals involving assets worth more than $100 billion have been completed.

Industry Consolidation
Number of M&A deals in asset management industry
Source: BCG

BCG, though, warns that M&A is no panacea:

While scale is important in asset management, growth through acquisition is a winning formula only if it achieves or consolidates a winning business model. If done for the wrong reasons, a merger can dilute the brand, erode margins, and drive away the firm's top talent.

The choice, as BCG sees it, is for asset managers to take one of four paths, becoming either "true alpha shops, beta factories, solution providers or distribution powerhouses."

Returning to the analogy of the car industry, the only question is who will end up as Toyota Motor Corp., and who will suffer the fate of Oldsmobile, Studebaker, British Leyland and DeLorean?

--Gadfly's Elaine He contributed graphics.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at

To contact the editor responsible for this story:
Edward Evans at