In a new report ‘Asset & Wealth Management Revolution: Embracing Exponential Change’, PwC anticipates that global Assets under Management (AuM) will almost double in size by 2025, from US$84.9 trillion in 2016 to US$111.2 trillion by 2020, and then again to US$145.4 trillion by 2025. While the report predicts rapid growth for the asset & wealth management industry, it also warns that firms needs to take action now, if they’re to survive an exponential level of change.
Alsue du Preez, Asset and Wealth Management Leader, PwC South Africa says: “We believe the industry will look very different in the near future - there will be changes to fees, products, distribution, regulation, technology and people skills. Change is taking place at a rapid pace, and asset and wealth managers must become business revolutionaries, if they want to survive and prosper.”
Du Preez comments further: “In our view, asset and wealth managers must act now to focus on three things as their industry moves to a new paradigm: First, asset and wealth managers must have a view of the landscape of tomorrow, a clear strategy and know their differentiating capabilities. Firms must take the necessary steps and invest in building their businesses strategically. Second, firms must embrace technology as it impacts all functions. How well they incorporate new technologies will help determine which firms will prosper in the years ahead. And thirdly, talent is a global challenge and new skills are needed. Asset and wealth managers must find and develop talent and adapt their employment models to nurture and retain people.”
Set for rapid, if uneven, growth
The burgeoning wealth of high-net worth individuals and the mass affluent, as well as a pronounced shift to defined contribution retirement saving, are propelling huge growth in the Asset & Wealth Management industry.
Retail (mutual) funds (including ETFs) will almost double assets by 2025 and institutional mandates will expand similarly. Alternative asset classes – in particular, real assets, private equity and private debt – will more than double in size, as investors diversify to reduce volatility and achieve specific outcomes. The industry is set to manage a greater share of global retirement and pension funds too. If current growth is sustained, the industry’s penetration rate (managed assets, as a proportion of total assets) will expand from 39.6% in 2016 to 42.1% by 2025.
PwC anticipates assets growing at 5.7% a year in North America from 2016 to 2020, slowing to 4.0% per annum from 2020 to 2025, lifting assets from US$46.9 trillion to US$71.2 trillion over the nine years. Similarly, Europe is projected to grow at 8.4% and 3.4% per annum respectively over the two periods, with assets rising from US$21.9 trillion to US$35.7 trillion. The Middle East and Africa is projected to grow 10.6% a year from 2016 to 2020 and 9.5% from 2020 to 2025, increasing assets from US$0.7 trillion to US$1.6 trillion.
Developing Asia-Pacific’s dynamism is set to spur growth of 8.7% a year from 2016 to 2020, accelerating to 11.8% from 2020 to 2025. This will lift regional assets from US$12.1 trillion to US$29.6 trillion. Latin America is likely to grow at similarly rapid rates of 7.5% per annum from 2016 to 2020, accelerating to 10.4% a year from 2020 to 2025. From a low base of US$3.3 trillion, the region’s assets are projected to increase to US$7.3 trillion.
Active investments will continue to lose market share to passives and alternatives, but AuM will increase across all three lines
Active, passive and alternative strategies are becoming building blocks for multi-asset, outcome-based solutions. In this context, demand for passive and alternative strategies will grow, but the place for active management will remain.
PwC forecasts that funds under active management will climb from US$60.6 trillion in 2016 to US$87.6 trillion by 2025, but their share of overall global assets under management will decrease from 71% in 2016 to 60% by 2025. Passives will gain huge market share, rising from 17% of AuM in 2016 to 25% in 2025, while alternatives rise from 12% to 15%. Passives’ AuM will more than double, from US$14.2 trillion to US$36.6 trillion; alternatives from US$10.1 trillion to US$21.1 trillion.
Du Preez adds: “We are optimistic for both active and passive investing. While active management will continue to play an important role, its growth over the near term will be slower than passive. But in the liquidity-driven market environment that favoured passive investment will peak, triggering market corrections which will remind investors that passive funds offer no downside protection and by contrast, smart active strategies may be more resilient. In our view, active and passive complement each other and both will be key building blocks in balanced portfolios to meet investor outcomes.”
Funding the future – bridging the retirement savings gap and funding bridges, power grids and retirement homes
Asset and wealth managers have been filling the financing gaps resulting from the global financial crisis. PwC predicts that their involvement in niches such as trade finance, peer-to-peer lending and infrastructure will dramatically increase.
Helping individuals to save for old age, as governments step back, is also a new opportunity to achieve profitable growth. All over the world, governments are relying on individual retirement accounts and defined contribution plans to help people save for retirement. Expansion in these assets as the world population builds wealth and life expectancy rises is one of the main forces driving PwC’s optimistic forecasts for growth in assets under management.
Investment firms will provide capital in areas such as trade finance and peer-to-peer lending. They will be more active in all aspects of syndicated lending activities traditionally undertaken by banks, e.g. arranging a syndicate of investors for large infrastructure projects. PwC anticipates soaring growth in real assets – mainly infrastructure and to a lesser extent real estate. Over the four years from 2016-2020, PwC forecasts a 27.5% per annum growth rate in infrastructure, slowing to 15% from 2020-2025. Infrastructure assets will expand more than fivefold, from US$0.6 trillion in 2016, to US$3.4 trillion in 2025.
Technology will impact every aspect of asset and wealth management
Asset managers need a keen eye for the technological developments that will be driving exponential change. Machine learning and AI are set to change the way research and portfolio management is conducted and Robotic Process Automation will revolutionise the back and middle office, while blockchain could have a profound impact on the services industry. They must design new products and services that meet changing needs. This vital social role is also one of the reasons why regulators around the world are making sure that fees are fair and advice is suitable.