THE GLOBAL asset management industry is coming out from the shadows and by 2020 is forecast to be worth more than $100-trillion as new pools of capital become available. Until now it has largely operated in the background of the bigger banking and insurance sectors, but streamlined platforms, targeted solutions and more trusted brands are expected to drive rapid growth.
This sector may not overtake banks any time soon — it has assets under management of just under $64-trillion, compared with the $143-trillion estimated value of global banking activity, according to research firm MarketLine — but the time for asset management to shine is approaching as banks struggle to keep pace with the growing demands on their capital.
A new report by PwC says assets under management are expected to exceed $100-trillion by 2020, with growth in emerging markets seen as outpacing the developed world.
Assets under management in Africa and the Middle East are set for compound annual growth of 12% to $1.5-trillion by 2020, from only $600bn now, according to PwC’s Brave New World report.
Banking Association of South Africa MD Cas Coovadia sees the growth of the asset-management sector as "a healthy thing", as it will expand the distribution of services banks do not provide.
"It allows banks to focus on the types of services they should provide, like savings products, and credit extension for short-and long-term loans. It could create a healthier balance," he says.
The deputy executive officer for capital markets at the Financial Services Board, Bert Chanetsa, says bank funding is not "patient capital", so other solutions need to be found to build up the "firepower" needed for long-term financing.
"This is a big issue for growth in emerging markets, as it relates to infrastructure or small-and medium-sized business growth."
Mr Chanetsa, who was appointed vice-chairman of the Growth and Emerging Markets Committee of the International Organisation of Securities Commissions (Iosco) last year, says the issue of funding and financing for big projects from fund managers will feature on the agenda at Iosco’s Brisbane meeting in November.
According to PwC, South America, Asia, Africa and the Middle East are rising in importance, with the assets under management in these areas set to grow faster than in the developed world in the years leading up to 2020.
"These flows will be considerably enhanced by the likely internationalisation of the Chinese renminbi by 2020, which will open up what will eventually become one of the world’s significant asset-management markets," says the PwC report.
According Ilse French, Africa asset management leader at PwC SA, compliance has been "a major barrier to entry".
Another challenge is getting strategies in place to access the lower-income areas of the market via low-cost solutions.
"We need platforms to attract the masses in a South African context," she says. "But funeral products have shown this can work. A big driver, though, will be costs."
PwC asset management leader John Parkhouse sees a "move down the value chain" taking place, with asset managers beginning to move away from strategies that target only the affluent market.
"You need to marry technology to handle transactions for multibillion-dollar funds, with the needs of the mass market," he says.
While costs of regulation will become a bigger issue as the industry gets more regulated, Mr Parkhouse cautions against "forcing through regulation", only for amendments to be needed later on due to realities on the ground.
He expects sovereign wealth funds and social initiatives to play a greater role over the next seven to eight years.
Alternative classes of funds, such as hedge funds, are also expected to become "more mainstream", and active management grows at a slower pace than passive management and alternatives.
Passive investments are those that do not require active management, such as index tracker funds, while active management involves selecting assets according to the fund manager’s strategy.
The shift away from active management towards passive investments comes as investors seek to cut out the costs of paying a manager to make investment decisions, and as governments try to drive fees lower in a bid to encourage saving.
In the case of alternatives such as hedge funds, growth is being driven by changing regulations that are paving the way for pension funds to increase their holdings of these types of investment.
A new breed of global manager will emerge as costs, compliance and the ability to offer a greater variety of investment options become critical.
Managers of the future will have the technology at their disposal to be able to offer multi-asset solutions to clients based on highly streamlined platforms, and will look to compete everywhere.
PwC’s global asset management alternatives leader, Mike Greenstein, says regulation will enable alternative managers to become mainstream, as "to be credible, you need to be regulated".
"We are seeing a blurring of the line between traditional managers and alternative managers. For example, more traditional private equity firms are getting into the hedge fund space or focusing on real estate."
MarketLine’s research estimates credit extended by banks will be just over $85-trillion this year, marking growth of 58% over the past five years.
PwC global asset management leader Barry Benjamin says the future will be based on trust. With banks not taking on as much risk, he says, asset managers will play a bigger role in lending to larger, and higher-risk, projects.
Risk aversion in the wake of the 2008 financial crisis and ensuing recessions has driven growth in sovereign wealth funds, which offer investors greater stability. Their attraction is expected to enhance savings for future generations.
The PwC research predicts 7% annual growth for these funds to 2020, to $8.9-trillion.
Meanwhile, pension fund assets are expected to reach close to $57-trillion by 2020.
Unit trusts will be worth as much as $48-trillion by 2020 from $30.4-trillion now.
This growth is expected to be fuelled by the growing middle-class client base that is saving for retirement and wealth accumulation.
Source BusinessDay
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