European asset management industry profits no longer shine

Mutual funds are making a comeback in the hearts of European investors, and so, after a sharp decline in 2022, the industry was back in full swing in 2024, with assets reaching a record EUR 28 trillion, up 2% from their previous peak in 2021. The recovery continued in the first quarter of 2025, with net inflows of 1.5% for open-ended funds and ETFs, according to Morningstar data. However, the industry's earnings for 2024 remain 20 per cent below 2021's record results, with the average operating margin down three basis points due to rising costs. These are the main findings of an analysis conducted by McKinsey on asset management companies in Europe.

In 2024, net flows in European asset management grew to EUR 593 billion, far from the record of EUR 1 trillion in 2021. A significant share went into low-margin products, such as passive funds (EUR 316 billion), money market funds (EUR 133 billion) and active bonds (EUR 321 billion). Among high-margin products, alternative investments recorded moderate net inflows of EUR 52 billion. According to the McKinsey analysis based on Morningstar data on open-ended funds and ETFs, this trend continued in the first quarter of 2025: around 41% of net flows went to passive funds (equity and bond), 34% to active bond and 27% to money market, while active equity experienced slight outflows.

In early 2025, there was a surge in volatility and heavy losses in equity markets, led by the US, which was followed by a wave of selling on US ten-year Treasuries. European asset managers reacted: the allocation to US equities has halved since February 2025. Thus, the recent volatility has had less of an impact on European asset managers, but they have suffered from exposure to the US due to the depreciation of the dollar against the euro and the Swiss franc.

Among the trends in addition to the growth of ETFs is that of digital assets, which grew strongly: the crypto segment rose by 75% annually between 2019 and 2024. At the end of 2024, the capitalisation of cryptocurrencies exceeded EUR 3 trillion, or about 2.5 per cent of the total capitalisation of global equity markets (excluding other digital assets). "We analysed the trends and developed three possible scenarios for 2025," explains Nunzio Digiacomo, McKinsey partner, "0% market return with a 1% net flow effect in 2025; 7.5% negative market return with a 1% negative flow effect; 15% negative market return with a 3% negative flow effect. In terms of industry profitability, the average cost-income ratio (CIR) at the end of 2025 would rise by five percentage points (from 64% at the end of 2024) in the intermediate scenario and by nine percentage points in the most negative scenario. In the intermediate scenario, the share of operators with a Cir above 70% would rise from the current 37% to 45%. The share of operators that might be unprofitable (i.e. with Cir above 100%) would increase from the current 1% to 4%'.

According to Digiacomo, the impact on revenues will vary depending on the characteristics of the individual operator. European asset managers, in fact, for the most part are not listed stand-alone, but are part of banking and insurance groups. While 80 per cent of the top 30 European banking and insurance groups are listed, in the asset management industry the share drops to less than 20 per cent; moreover, listed asset managers are not homogeneous in terms of size or business model. It is therefore possible to outline revenue impact scenarios considering different types of players: the larger ones, for example, will be able to leverage their global business to mitigate shrinking European margins and consider expanding into new markets, such as South East Asia, the Middle East and South America. They will also have the opportunity to compete in more profitable asset classes, such as alternatives, either by developing in-house expertise or through partnerships and acquisitions of specialised players. Finally, they will have a larger budget for technological development, which will be useful for modernising their IT infrastructure and investing in artificial intelligence, bringing to scale the benefits in terms of costs and revenues in the medium term. The situation is different for medium-sized listed operators, without specialisation in high-yield asset classes, which will be more exposed to an increase in cost-income if they are unable to innovate in terms of product and technology, while reviewing their operating model to make it more flexible and efficient