Developing sustainable advantage in asset management

This paper considers how asset management firms seek to develop sustainable advantage in a fragmented industry that has few obvious economies of scale and scope. It shows that the generic competitive strategies of cost leadership and differentiation are both applicable but lead to very different types of asset management firms. The key differentiators for firms are in their investment philosophies and attitude to trading. How firms address these two dimensions leads to various ‘types’ of asset management firms which rely to a greater or lesser extent on cost or information-processing advantages. Firms which pursue information advantage and seek to exploit this via portfolio rebalancing can be categorised as active and seek to differentiate themselves through above-average performance. Firms which successfully pursue this strategy are able to differentiate themselves and command significant fees for their services. On the other hand, asset management firms that are purely cost driven seek to exploit those economies of scale and scope that exist in the industry and also seek to spread establishment costs across large sums of assets under management. Such firms tend to offer easily scalable products such as indexing and compete almost exclusively on price. While the active – passive split represents the two generic strategies, there are also hybrid strategies which are more complex to execute but which if successful can also create sustainable competitive advantage.