GLOBAL - Fewer and bigger players applying capabilities across a broad range of asset classes and strategies to deliver solutions rather than products - is the future of Europe's asset management industry as it goes through "unprecedented" change, according to State Street's latest VisionFocus.

Consolidation has already been driven by banks selling their asset management divisions, as regulators, boards and shareholders pressure them to return to their core businesses, and they take the opportunity to monetise the spread in earnings multiples between themselves and other public-listed asset managers.

Many feel they can maintain some revenues from asset management by providing 'white-label' products.

Mike Karpik, head of Investments and fund products at State Street in EMEA, said: "Last year, those sales caused banks some pain, but now, more stability in equity markets means better pricing.

"That's why we see that trend continuing, even though we have seen a lot of activity in the past year or so."

Increasing regulatory demands are also driving fixed costs up for independent asset managers.

Stephen Smit, State Street's head of global services in the UK, the Middle East and Africa, said: "Fund managers have to make their fixed costs variable - something they failed to address before the crisis."

That has led to more outsourcing of middle-office operations, even by small and medium-sized managers, typical savings from which have been estimated at 15-20% by Alpha Financial Markets Consulting.

But it is also driving the consolidation trend.

"Regulation is asking people to increase their risk and marketing transparency and documentation - while investors are demanding lower and lower fees," said Karpik.

"That's why we think scale is the way to go - whether that's offering a broad range of products or as a multi-boutique."

Radical changes in investment strategy are also changing the landscape, according to the report, in particular what Karpik called "the barbell approach to risk".

Investors who previously allocated across the whole spectrum of risk have been deserting the middle ground in favour of high-alpha active management at one end and passive indexed at the other.

Smit drew attention to a recent McKinsey & Co study indicating that while assets under management and costs were back to pre-crisis levels, revenues were only at 75% of those levels.

"That's largely because assets have flowed back to passive, fixed income and cash products that have lower margins," he said.

Karpik noted that the difficulty of competing with the big incumbents in the passive space meant all the competition was between active managers.

This, together with the trend to 'barbell' risk allocation, is putting margins under pressure.

"This is leading to restructuring and a pick-up in M&A," he said.

"A lot of those managers are 'in-play' - some willingly and others less willingly."