US asset management companies are enjoying their best financial performance for five years but the gap between well and badly managed companies is widening, according to research by consultancy McKinsey & Co.

A survey of 80 US managers with a combined $8 trillion (€6.3 trillion) under management revealed operating margins for the top third are 41 percentage points ahead of the bottom third. In 2003, it was 32 percentage points. McKinsey's research said: "An increasing proportion of asset managers are earning margins under 20% as bottom-tier performers fall further behind." Average pre-tax margins are 31%, the healthiest level for five years. But growth has mainly resulted from rising stock markets rather than additional business. Cost cutting has ceased and staff numbers are rising. The research added: "The asset management industry has not been as rigorous at driving operational efficiency improvements as other financial services firms, which face much greater profit pressures." Managers that have made efficiencies enjoy $1.2bn of product sales per person against $470m for the bottom tier. McKinsey believes the stalling of productivity at some firms is a reason for their deterioration in margins. The lack of interest in traditional products has also caused problems – insurers, hedge funds and investment banks are challenging asset managers. Institutions are more discriminating in the type of product they want. Traditional, lower-risk mandates are being terminated by pension schemes in favour of quantitative and high-risk products – money invested in quant ballooned by 47% last year. Fees have come under pressure, particularly in the retail market, where mutual fund fees have fallen to 48 basis points against 59 in 2001. Traditional institutional products were also under pressure, as fees for balanced funds dropped 11% last year. For a typical firm, a 10% decline in prices would decrease pre-tax margins by a fifth.