Rush hour in New York City ... North America, the world’s largest region in terms of asset management, experienced the strongest growth of 19% last year, adding US$6.7 trillion in value
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The global asset management industry had a good year in 2019, having experienced significant improvement after a decline of US$2 trillion in assets under management (AUM) in 2018. According to the Boston Consulting Group’s (BCG) recent report, Global Asset Management 2020: Protect, Adapt, and Innovate, the total AUM in nearly every region saw double-digit growth last year, attributed to strong market performance and net flow figures.
Global AUM stood at US$89 trillion, up 15% from 2018. Retail clients represented 42% (US$37 trillion) of global assets, having seen a growth of 19%. Institutional clients made up 58% of the market, having grown the AUM by 13% to US$52 trillion.
“Market performance was the primary driver of this growth, contributing roughly three quarters of the AUM growth in 2019 as markets across regions posted record highs for the period since the 2008 global financial crisis. The MSCI World Index realised a return of 27% for the year — its strongest showing since 2009 — when it achieved a return of 35%,” says the BCG report.
Record net new asset flows last year showed that there was robust investor demand. Net flows totalled US$2.6 trillion globally, making up 3.4% of the global AUM at the start of the year. This was a significantly higher proportion than the historical average of 1% to 2%.
This growth is attributed to heavy demand from retail investors, who contributed 4.7% of net flows, compared with institutional investors’ 1.8%. “Retail’s standout year was driven by a strong confluence of wealth accumulation, bullish market conditions and improved access to investment platforms and vehicles,” says the report.
North America, the world’s largest region in terms of asset management, experienced the strongest growth of 19% last year, adding US$6.7 trillion in value. Much of the AUM expansion in the region is attributed to quantitative easing, strong consumer spending and a historically low unemployment rate, says the report. “These tailwinds helped investors overcome performance threats arising from a potential trade war and early-stage recession scares, resulting in one of the region’s most robust growth periods in recent years.”
Europe saw strong AUM growth too as the second largest region by assets, rising 13% (US$22.8 trillion) last year. The UK held 27% of market share (US$6.1 trillion), representing an expansion of 13%, despite the looming Brexit concerns. The institutional segment, representing 79% of the UK’s AUM, was a major driver of the nation’s wealth, having grown by 13%.
Growth was slower in Asia-Pacific as the most developed markets in the region, Japan and Australia, collectively grew 12% (US$6.6 trillion). Other countries in the region grew at a slightly slower rate of 11% to US$11.2 trillion. The Chinese asset management industry tilts towards retail investors, which account for 60% of the country’s total AUM and showed strong growth of 14%.
“This growth rate was heavily influenced by China, the second largest asset management market in the world, where non-channel AUM (excluding bank wealth management products and trust companies) is estimated to have expanded 10% in 2019, reaching US$7.3 trillion,” says the report.
Growth of alternative investments
Alternative products captured 13% of AUM last year, growing from less than 10% of the total market AUM in 2003 to 16% last year. This segment has become the largest revenue pool across products and is likely to capture a 49% share of global revenue by 2024.
The key drivers of this growth are investor demand for heightened performance, uncorrelated returns, illiquidity premiums and other non-traditional return profiles, particularly as institutions across the globe face the challenge of a widening gap between assets and liabilities.
Private markets — including private equity, real estate, infrastructure and private debt — have grown at an annual pace of 9% since 2008 and today represent 66% of AUM and 60% of revenue in the alternatives segment. Within the private markets segment, private equity AUM grew 11% while real estate, infrastructure and private debt AUM rose 5%, 15% and 12% respectively.
Despite the high fees and illiquidity, investors have flocked to private market funds in search of better-than-average market performance and access to illiquidity premiums. By and large, fund managers have delivered, as private asset classes have outperformed public markets across the globe for the past two decades.
“Going forward, we expect sustained demand despite increased investor caution. As a result, these asset classes are likely to capture a disproportionate share of growth in the space, growing at a compound annual growth rate (CAGR) of 6% and representing 71% and 68% of alternatives AUM and revenue respectively by 2024,” says the report.
“We expect much of this growth to continue accruing to the largest players: funds with AUM in excess of US$5 billion increased their share of capital raised from 8% in 2010 to more than 43% in 2018.”
Hedge funds, on the other hand, have seen their global AUM growth taper to a CAGR of 3% over the past five years, continuing to underperform against expectations. Overall returns in the past decade have trailed the S&P 500 every year.
Some hedge funds remain well positioned to win in the space, says the report. Capital is flowing disproportionately into larger funds as investors prioritise reputation and track record. Most of the net asset flows over the past 10 years have gone to funds with AUM of more than US$5 billion, accounting for US$142 billion in capital flow, while funds with AUM of less than US$100 million were placed a distant second with US$33 billion in net asset flows.
“We expect hedge fund AUM to grow 1% annually through 2024 and we expect revenue growth to compress further, shrinking 1% annually as investors respond warily to the current economic outlook. As a result, underperforming firms are likely to face redemptions and outflows,” says the report.
“The smaller funds retain some niche market appeal, but mid-sized funds with assets in the range of US$500 million to US$5 billion are having difficulty achieving scale and have lost US$98 billion in asset flows over the past decade.”
In the current economic landscape, some asset managers will play defence, consciously shunning the opportunity in private markets in favour of focusing on their core business and reducing costs. Others will play offence, prioritising this new market as a potential growth engine, even in the face of economic uncertainty.
The report says one way to start tapping into private markets may be to offer select vehicles through retirement plans, where participants have long investment horizons and would be thrilled at the prospect of collecting an illiquidity premium. “Firms that choose to pursue any retail segment must deal with significant issues related to product development, such as how to structure products to ensure enough liquidity for some redemptions, or how to build a retail secondary market in case of an urgent need for cash. The winners in this space will quickly establish, scale and industrialise these new capabilities.”
Environmental, social and governance considerations are gaining ground as investment criteria in private markets as well. Real estate and infrastructure investments, in particular, lend themselves well to environmental and social considerations. The report says private equity investments, especially majority stakes, are naturally suited to influence governance decisions. “We advise private asset managers, at a minimum, to have a clearly articulated point of view to facilitate investor discussions on the topic as the standard for transparency is quickly rising.”
Industry impacted by pandemic
The market turbulence earlier this year due to the Covid-19 pandemic and resulting economic crisis will undoubtedly have a ripple effect on the asset management industry. During this period, the industry is expected to see an increase in passive assets, fast-tracked digitisation and the introduction of innovative products, according to Boston Consulting Group’s Global Asset Management 2020: Protect, Adapt, and Innovate report.
“The financial crisis of 2008/09 prompted the rise of passive assets and catalysed a winner-take-all phenomenon — especially in the US, where the top 10 firms have captured about 80% of net mutual fund flows. We expect this phenomenon to continue in response to the early 2020 crisis. We also expect this period to see accelerated digitisation, increased mergers-and-acquisitions activity as well as product innovation,” says the report.
“Although the asset management industry still has lofty margins compared with other financial service providers and has proved to be resilient in previous market drawdowns, asset managers need to consider how they will adapt to the new reality.”
Last year, despite the notable growth of its assets under management, the industry still faced structural challenges caused by fee compression and mounting cost pressures persisted, to the point that industry profitability decreased marginally, says the report.
“The market storm of early 2020 has only intensified these challenges as asset managers find themselves in uncharted territory. After the crash of 2008, the asset management industry benefited from a market rebound that produced the longest bull market in history. In 2020, however, firms must recover flows and profitability through more fundamental changes to their business models,” it adds.