Asian asset managers are not doing enough to diversify from traditional assets into alternatives and so are crimping profitability, even as the region's industry grew 11% year-on-year in 2012, finds Boston Consulting Group (BCG).

Asia-Pacific assets rose to $10.1 trillion last year, from $9.1 trillion in 2011. But exclude Japan and Australia, and assets rose a faster 18.7% to $3.8 trillion, from $3.2 trillion, outpacing North American growth of 9% and Europe's 8% rise, the US consulting firm notes in its annual global asset management report.

Global manager AUM, meanwhile, swelled to a record $62.4 trillion last year, up 9% from 2011 and surpassing the previous record of $57.2 trillion set pre-financial crisis in 2007.

“Higher penetration of asset management products – via private banks, insurance companies – has been driving growth last year," Tang Tjun, a senior partner and managing director of BCG in Hong Kong, tells AsianInvestor.

"Meanwhile, generally strong underlying GDP of Asian markets, and [the] rising middle class in these markets have combined to translate into more discretionary income available to be invested into financial products.”

Despite this increase in wealth accumulation, Tang says Asian managers are not doing enough to diversify away from traditional core assets, such as equities, into non-traditional asset classes including offshore renminbi bonds, real estate or infrastructure.

As a result, Asian managers’ profitability – or profit as a percentage of net revenues – was lower than their global counterparts, at 35% compared with 37%.

According to the survey, out of the top 10 strategies’ $183 billion in net sales in Asia, just $36 billion was invested in non-traditional asset classes, including offshore renminbi bonds, real estate and infrastructure.

Although Asian managers tend to stick to vanilla strategies, institutional investors are increasingly seeking ways of diversifying, be it through infrastructure or real estate, notes Tang. And if Asian managers continue to avoid these strategies, there is a possibility that US and UK managers will set up their own teams in Asia to capture this money, he warns.

“We have not seen a lot of traditional asset managers in Asia branching out to developing new, specialist or multi-asset capabilities,” Tang says. “The only exception is Australia, where the penetration of alternatives and specialised strategies – including significant penetration of real estate and infrastructure funds – represent about 20% of the entire fund industry AUM.”

BCG notes that managers of non-traditional strategies were able to generate higher fees. Over the past two years, the compound annual growth rate (CAGR) of these managers’ profits from 2010 through 2012 was 10%.

This compares with a cumulative profit decline of 2% for traditional managers over the same period, which BCG defines as asset managers with more than 70% of assets in developed market large-cap equities, developed market government debt, structured products, money market strategies and balanced funds.