Looking back and looking ahead – observations and early indicators for new asset allocation trendlines 

Challenging industry dynamics for asset managers continued in 2024, showing no signs of abating in 2025, says Marcus Kuntz, head of sales and fund distribution, Universal Investment.

Consolidation, top-heavy flow concentration, and increasing cost pressures have created a complex environment, particularly for lower- and mid-market asset managers. These firms must make strategic choices on fund domicile and structure, and partnerships with third-party providers are becoming essential to allow asset and wealth managers to focus on their core competencies.

Diversification indicators: allocation, fund Structures, third-party partnerships

The challenging dynamics of 2023 carried into 2024, with anticipated normalisation failing to materialise. Investors’ caution remains apparent, impacting allocations across new investments and higher-risk asset classes.

Large asset managers continue to raise assets, pushing global AUM to €121.13trn, concentrated among few providers. Meanwhile, smaller firms faced a tough fundraising environment. For boutique managers attracting new capital, selecting the right vehicle will be critical to facilitate fundraising. This year, Irish-domiciled UCITS vehicles, which surpassed €4.3trn, were favoured by funds targeting UK and Scandinavian investors, while Luxembourg remained the choice for Southern European funds.

Marketing alternative asset classes also requires careful selection of domicile and partnering with providers adept at marketing and brand building. This is particularly vital for boutique firms seeking to enhance credibility in a cautious market environment.

Diversification into markets continues to drive revenue growth. While markets in the US, UK, and much of Europe are saturated, Latin America offers substantial potential. AUM in the region is expected to grow from €1.08trn to €1.21trn over the next five years. Firms are increasingly deploying human capital to capitalise on these opportunities.
Although we see this as a cyclical shift towards global growth markets, Europe still offers sufficient potential for asset managers, particularly as macroeconomic conditions improve. We anticipate that European markets will regain focus as they stabilise.

Macro-economic drivers: interest rates, inflation, and geopolitics

Interest rate reductions and cooling inflation may eventually shift the asset class focus, but no discernible trends have emerged yet.

Geopolitical tensions remain a significant concern for wealth managers, who view these as the greatest threat to capital markets in 2025. Germany’s political landscape has become particularly volatile, with early elections looming following the collapse of its three-party coalition. These elections will have profound implications for Germany and Europe.

On the global stage, Trump’s recent victory is expected to have a substantial impact the global economy, particularly on China. Although investors continued to invest in Chinese equities and real estate in 2024, heightened US-China trade tensions may prompt reduced holdings in Chinese assets as risk management intensifies. Despite these pressures and strong volatility, Chinese markets remain notably stronger than a year ago, calling for close observation by asset managers.

The rise of alternatives: ELTIF 2.0 and private market democratisation

Europe, a relatively under-invested market for alternatives, is experiencing growing demand for ELTIF vehicles across retail and institutional investors. Educating the market and promoting acceptance of alternative asset classes will be crucial, especially among retail investors.

Surprisingly, significant interest has emerged in smaller investments, often below EUR 100k. ELTIF 2.0 has proven instrumental in providing a robust operational structure and regulatory framework for asset managers expanding into alternatives. Finalised technical standards in October 2024 have paved the way for broader adoption, which is expected to accelerate in 2025. 
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Trends among fund of funds – emerging markets and ESG

Fund of Funds strategies are evolving, with some reducing exposure to emerging market equities and fixed income. While it is premature to declare a clear trend, reduced allocations to emerging market bonds – both government and corporate – are becoming noticeable.

Simultaneously, demand for ESG-related reporting continues to rise, particularly among Fund of Funds. However, sustainability reporting in target funds remains a manual and operationally complex process due to inconsistent approaches. For example, some UCITS vehicles rely on exclusion lists, while others benchmark against the MSCI, leading to challenges for fund managers.

Conclusion

The asset management industry continues to navigate a challenging environment. For lower- to mid-market firms, optimising growth will require strategic decisions around fund domicile, structure, and outsourcing to enhance efficiency. Diversifying into growth markets like Latin America, leveraging ELTIF 2.0 for alternative investments, and navigating ESG and geopolitical complexities will be critical as firms position themselves for success for 2025. 
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