McKinsey & Co. released their annual state of the asset management industry survey earlier today – and it contains what the company refers to as some “surprising” findings.  The annual report (see related posts on the last two editions) is conducted in partnership with Institutional Investor’s “US Institute” and is based on the results of surveys of 90 US money managers.  This year’s edition (available here) covers the year 2007.

At the top of the list of surprises was that while 2007 looked like a banner year overall for US asset managers, asset growth was flat in Q3 and turned negative in Q4.  Making matters worse, costs continue to drift upward – mitigating the effect of higher assets on overall margins.  Part of the problem, says McKinsey, is that headcount continues to rise, and is now up 23% over the past 2 year.

The survey also finds that “outperformers” – those managers with the highest net margins – cut compensation per employee by 1%, while “underperformers” continued to hand out juicy bonuses, leading to a 6% increase in average compensation.  Compensation is generally considered the biggest expense for any investment manager.

Barbells

The report contains evidence of the so-called “barbell” in asset management (see yesterday’s post).  But the chart below from the report also shows a modest reversal of the recent flight to “higher alpha” and “cheap beta” products.

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