Asset managers worldwide must adapt to a new reality: individual rather than institutions will drive growth of their businesses for the next five years, and Chinese investors will account for an “outsized” portion of that expansion, according to a new report* from funds industry consultancy Casey Quirk.

The US firm forecasts that assets under management in professionally managed Chinese equities and bonds will rise from $817 billion to $2.82 trillion by the end of 2019, with mainland investors accounting for almost half of the total (see figure below). And individual Chinese investors will account for 80% of that $1.47 trillion, it said.

Mainland mutual fund investors could buy more than $1 trillion of mutual fund shares between now and 2019, representing an organic growth rate of more than 15% per annum, noted the report.  

“This year’s painful market correction will fail to interrupt secular trends, including the China Securities Regulatory Commission’s reform agenda, driving Chinese individuals from deposits to investments,” it said. “Even as Beijing relaxes current curbs on global investing, Chinese investors will remain locally focused."

Not good news, then, for foreign fund houses eager to sell international strategies to mainlanders via the Hong Kong-China mutual recognition scheme.

Moreover, said the report, “domestic demand will transform China’s asset managers into some of the world’s largest, and consequently they will face some of the same strategic issues that impact global players”. It cited challenges such as talent retention and differentiation in a crowded marketplace. 

But international fund houses have issues to worry about beyond China, according to Casey Quirk. Organic growth in the asset management industry will fall below 2% by 2020 (after averaging 7% since 2010), predicts the report, and 120% of net new flows into investment strategies will come from individual investors, up from 93% in 2014 (see figure below).

This reinforces a warning sounded by the consultancy in May last year that institutional asset management opportunities were drying up in Asia Pacific.

“While the industry’s economics remain attractive with revenues and operating profit margins touching all-time highs in 2014 and remaining favourable despite market volatility in 2015, new pressures are emerging,” said Casey Quirk. It pointed to “too many firms … chasing a slower-growing business, new entrants into the market from rival financial services firms, and the growing importance of the individual as the driver”. 

The report also argued that the rise of the individual investor will accelerate some longer-term changes in the industry, such as that investment performance will become more difficult to report, measure and compensate (through fees) in an individual-driven world, making brand more important. 

Moreover, it said, group financial services companies, with bigger brand budgets and more effective ways to service individuals, will seek to become more effective owners of asset managers and will spur M&A, which may encourage industry concentration.

* The Roar of the Crowd: How Individual Investors Transform Competition in Asset Management was released yesterday.