Passive assets to double market share: PwC

A new report makes some big calls on the funds industry, including the rise of discretionary management and the mass affluent in Asia, plus a shift into passive investments worldwide.
Passive assets to double market share: PwC

The way asset managers operate in 2020 will be significantly different compared with 2013, forecasts PwC in its wide-ranging new study, Asset Management 2020: A Brave New World.

Based on discussions with industry participants, the consultancy has set out a detailed discussion of major issues and trends – including growth figures and forecasts – covering alternatives, the active/passive debate and institutional and retail sales models.

One thing is predicted with certainty: the industry will be substantially bigger in seven years' time. It is how and where it will grow that are key to how asset managers need to respond in the years ahead.

Asia-Pacific assets under management – across institutional and retail – will more than double between 2012 and 2020 to $16.2 trillion, from $7.7 trillion, says PwC. At an annualised pace of 9.8%, this is well ahead of the global rate (6.0%), but behind those of Latin America (12.5%) and the Middle East and Africa (11.9%), though from a much larger base.

While Asia Pacific will not catch Europe and the US in terms of AUM – which will have $27.9 trillion and $49.4 trillion respectively – it will remain significantly smaller for the time being. But it will account for 16% of global AUM, substantially more than its 12% share in 2012.

Expanding wealth
In terms of high-net-worth assets, Asia Pacific is forecast to surpass Europe by 2020. PwC predicts It will hit $22.6 trillion compared with Europe’s $21.6 trillion, due to annualised AUM growth of 7.5%, as against Europe’s 3.1%. The US will remain out in front with $30.6 trillion, forecasts PwC. Latin America and Africa will post annual growth of 9.0% to $1.9 trillion and 6.0% to $0.3 trillion, respectively.

It is the mass-affluent segment that PwC tips for fastest growth (6.8% annualised) – and this will be driven by Asia Pacific. Between 2012 and 2020 the region is forecast to grow at the same pace (10% annually) as other EM regions into the biggest pool of mass-affluent assets worldwide: $43.3 trillion as against second-placed Europe with $31.6 trillion.

The global middle class is projected to grow 180% between 2010 and 2040, with Asia replacing Europe as home to the highest proportion of middle class, as early as 2015, says PwC. “This increasing affluence will fuel the need for financial products for a young and growing constituency.”

The report says distribution will need to be “redrawn”. It argues that by 2020 “four distinct regional fund distribution blocks will have formed – thanks to fund passporting regimes – which will allow products to be sold pan-regionally, citing North Asia, South Asia, Latin America and Europe.

At your discretion…
One area PwC tips for greater traction in Asia is discretionary management; individuals will be increasingly inclined to allow external parties full control of their money.

“We feel there will be big growth in discretionary mandates, particularly in Asia,” says Justin Ong, Singapore asset management leader and Asia-Pacific private banking leader at PwC.

“More attention is being paid now to discretionary mandates among private wealth clients in Asia. There’s not necessarily a lot of money flowing into them yet, as a lot of education is required.” But the way is being paved for major growth in this area.

The generational shift in wealth taking place in Asia-Pacific will drive this trend, says Ong, with younger family members more likely to understand and use discretionary management services.

Asia-Pacific wealthy clients are more advanced on this front than those in Africa, Latin America or the Middle East, he notes. Hence they are likely to go through the shift to discretionary management earlier than those in other emerging markets.

Institutional growth
On the institutional side, the fastest growth in AUM (7.0% annually) is expected to come from sovereign wealth funds (SWFs), which are forecast to see their assets surge to $8.9 trillion by 2020, from $5.2 trillion in 2012. SWFs based in the Middle East and Africa will grow fastest, with Asia-Pacific entities also seeing a rapid rise, says the report.

“Approaches to the SWF market will evolve, becoming more sophisticated and more targeted,” notes PwC.

Pension assets will expand almost as quickly globally (by 6.6% annually), with the quickest rises coming in Latin America and Asia Pacific (9.9% and 9.5% growth rates respectively). In both regions AUM will double, to $5.0 trillion and $6.5 trillion, respectively. The Middle East and Africa region will post annualised growth of 8.8% to $1.1 trillion by 2020.

Still, Asia and the other emerging regions have a long way to go to match the European and American pension pools, which will hit $13.8 trillion and $30.1 trillion by 2020, predicts the report.

Getting passive
A major trend, particularly in the institutional segment, is the startling growth of passively managed investments. Such assets are tipped to treble in size to $22.7 trillion by 2020, to represent 22% of global AUM, up from 11% in 2012.

“The separation between alpha and beta currently observed in the industry will further accelerate” as investors seek low management fees and broad beta market exposure, says PwC.

Passive investing won’t necessarily grow any faster in Asia than elsewhere, says Ong, with the pace of flows into Asia-listed exchange-traded products, for instance, likely to remain steady.

However, a big driver on this front will be the rise of Asia in terms of its weighting in global indices, he argues. The region currently has an index weighting of 15-16% in MSCI World, but if that comes to reflect its proportion of global GDP (around 35%), he expects the assets of ETPs listed in Asia to grow exponentially.

And that is entirely possible by 2020, says Ong: “Seven years is a reasonable time in which to expect Asia’s representation in world indices to at least double.”

Seeking alternatives
The rising demand for alternative investments in Asia – particularly among institutions – has been well documented.

Globally, PwC expects alternative assets to double by 2020 to $13.0 trillion – a 9.3% growth annually, almost double the rate of growth of mutual funds (5.4%) and institutional mandates (5.7%).  

Regionally, expansion into alternatives such as private equity and real estate is happening faster in Asia than in other emerging markets, says Ong, and that is set to continue.

¬ Haymarket Media Limited. All rights reserved.