Detailed information about commissions, the profits and losses of individual asset management firms, and country-by-country results have always been hard to find, for in Europe the business is an opaque one. The only sure thing is that the industry is quite profitable.

In an attempt to fill this gap in knowledge, McKinsey conducted a survey of 33 European asset management companies, which hold a total of $1.2 trillion worth of assets under management—about 30 percent of European third-party assets. The survey focused on the amount and nature of those assets as well as on staffs, revenues, and costs. All major countries of Western Europe were represented, with a sufficient number of observations to estimate averages for 1998 and to make comparisons across countries (Exhibit 1).

Our survey confirmed that Europe’s asset management market still offers opportunities for profitable growth despite increasing competitive pressures. The average operating profit is 21 basis points (hundredths of a percentage point) of the value of assets under management, though the level of profit in individual countries varies widely—from 9 basis points in Germany to more than 40 in Spain and Portugal (Exhibit 2).

This range of variation reflects differences in the net revenues of asset managers more than differences in their cost structures. Average net revenues (gross sales fees and income from management fees, less payments to distribution channels) are 35 basis points—23 basis points for German firms, for example, and 53 basis points for Iberian ones.

Many factors affect the level of revenue: the type of assets managed (revenues from equities are higher than those from fixed-income investments or money market funds); customer segments (retail fees are higher than institutional ones); investment styles (fees for active stock selection are higher than those for passive index tracking); revenue-sharing agreements with distribution channels; the ability to realize hidden fees from trading or brokering; and the transparency or stage of development of the market (the Benelux countries, for example, are further advanced than Spain).

Costs vary comparatively little across Europe, ranging from an average of 11 basis points of assets under management in the Iberian countries to 17 basis points in the United Kingdom. Distribution costs vary by channel, compensation costs by the maturity of markets, and back-office costs by types of client. The mix of assets is among the main drivers of costs: equity funds, for instance, cost twice as much (5.1 basis points) to manage as fixed-income funds (2.6) and more than four times as much as money market funds (1.2).

Nonetheless, the cost of managing equity funds is surprisingly similar from one country to another (Exhibit 3): differences in the value of the assets each staff member manages typically offset differences in costs per fund manager. UK fund managers must pay higher compensation levels, which are linked to the cost of doing business in the London market; French and German firms have to cover high social welfare costs.

Not surprisingly, size matters in the asset management business, since its fixed costs are high. Large firms earn profits that are 25 percent (5 basis points) higher than those of their smaller domestic competitors. Economies of scale come mainly from sales and marketing as well as from information technology and support (Exhibit 4).

In the retail business, up to 80 percent of total costs are fixed and thus don’t rise with increases in the number of customers or the amount of assets managed. Such a high share of fixed costs should give large, very focused players a huge competitive advantage. Nonetheless, we found that large Continental fund managers don’t capture the whole benefit of scale—a weakness they must tackle. Increasingly, firms have to become specialist managers, offering small sets of products to large client bases instead of broad product ranges to smaller client bases. Continental firms will have to focus increasingly on specific investment styles, asset classes, regions, or industries and raise the amount of assets they manage within each product class. Only fund managers that do so can realize full economies of scale and beat Anglo-Saxon players with histories of narrower product offerings.