The start of 2019 is looking tough – markets are down, geopolitical risks high but it’s also one in which we believe the asset management industry can thrive.
China holds considerable opportunity, notwithstanding trade disputes; the trend toward sustainable investment has room to run, with better defined standards; and asset managers are creating value through technology.
The following are the top 10 trends that I think will have the greatest influence this year for the asset management industry.
By all accounts, 2019 will be an exciting year for China’s asset management industry. On the domestic front, firms will experience intense competition – and more innovation – as they fight to protect and capture market share. New rules related to the way Chinese banks manage client assets and recent efforts to stimulate the stock market should also catalyze significant activity.
Viewed against a backdrop of a slowing economy, this may seem like a difficult environment for foreign players. However, our view is there will still be significant opportunities for those players able to bring a more consumer-focused and digitally-enabled proposition to the market. Ownership requirements on foreign asset managers have also changed, and that is creating new opportunities for many players. Stay tuned for a raft of new partnership announcements between bigger global brands and China’s technology leaders this year.
Last year was another strong year for PE with buyout volumes in Americas and Europe both at record highs. Investor confidence appears to remain very robust with another solid year of fundraising (albeit a little off the exceptional volumes of 2017) and hence the stock of dry powder to supporting ongoing investment activity remain at record levels. The situation in Asia Pacific is slightly different, deal volumes in recent years have yet to grow in line with exceptionally strong fundraising resulting in dry powder growing substantially. While understanding the advantages of PE as a source of capital in the region has increased considerably, leading managers will still need to continue their efforts to broaden PE’s appeal as a capital solution, particularly at the larger deal sizes. This will ensure the market grows to absorb the committed capital.
High asset prices continue to be seen in the market and now are probably higher up the list of macro concerns as PE transitions from being a net seller of assets having largely cleared the post financial crisis exit backlog into a conveniently high priced market over the last few years. However, few expect imminent material correction and have therefore been putting more efforts into being innovative in creating more value in the portfolio. Increased use of digital technology and big data are assisting here. The PE investment model has a long track record of outperforming other asset classes, particularly public markets, and while market conditions remain challenging, we anticipate this out-performance to continue throughout 2019.
Over the last few years, Environmental, Social and Governance (ESG) priorities finally took their place on the asset management agenda. This year, the real work continues as regulators start to more clearly define their expectations for the industry.
Some markets are already working towards creating standardized taxonomies and disclosure requirements. Many are considering how to drive this down to the consumer level to ensure that asset managers are taking their clients’ ESG preferences into account. Expect many to place much greater focus on integrating ESG data points into their investment processes and client reporting.
In 2019, we expect to see more asset managers connect their technology dots in ways that unlock an entirely new level of agility, efficiency and value. For some, this will start with basic cloud enablement – a fundamental requirement for digital enablement to deliver on today’s customer expectations.
The leaders, on the other hand, will likely spend this year creating roadmaps and executing strategies that drive improved integration across the back, middle and front office. This will allow them to not only unblock process roadblocks, optimize technologies and eliminate redundancies, it should also lead to some strong competitive advantages.
All signs suggest that the asset management sector will continue to see increasing regulatory oversight, particularly related to systemic risk and investor protection, such as leverage and costs.
What may be surprising for some asset managers will be the growing demand (from regulators, governments and investors) to deliver on a basket of non-financial concerns. Some will be focused on encouraging more diversity within management company boards. Others will want to see greater disclosure on their funds’ ESG impacts. Most will start to clarify how they plan to regulate an industry that continues to grow and is becoming increasingly digital.
Over the past few years, in order to deploy their increasing capital into the largest possible universe of assets, we have seen a growing number of fund managers start to (1) invest directly, (2) explore non-core markets such as Eastern Europe and Asia, (3) expand the definition of what constitutes an ‘infrastructure’ asset to include, for example, care homes, data centers and telecom assets and (4) compete with corporates in the energy sector, offshore wind being a hot spot for larger investors.
This year, as well as the deployment of capital, we expect to see many infrastructure investors continuing to focus on building up the capabilities and experience required to ensure their new basket of diversified assets are delivering the rates of return they anticipated. Data, analytics, scenario planning and a robust investor communication plan will also be key so that they are able to manage the rise of populism and increased public scrutiny as to how they manage public assets.
This year, expect more focus on data and leveraging technology for analytics. Indeed, rather than just relying on experience and understanding of the markets and cycles, real estate investors are starting to place increasing value on data-driven decision-making tools and processes.
Some real estate investors will be focusing on finding the right balance of future investments to ride out the next cycle. Others are looking for unexpected trends that may uncover new sources of competitive advantage. Those with operational real estate investments will also be keen to turn their data into operational efficiencies and better yields. Operators will be evolving their business model and new shifts in technology will change the behaviour of both landlords and tenants.
Against a backdrop of increased protectionism and nationalism, many institutional investors are finding some foreign investment markets to be increasingly challenging (particularly when it comes to foreign investments into core infrastructure assets).
In response, we expect to see some institutional investors start to communicate more directly with the public and with authorities about the benefits their investments can deliver and greater engagement with regulators and governments. This year, expect to hear institutional investors communicating their key messages to the public.
The ETF market continues to show strong signs of positive growth and many asset managers are starting to recognize ETFs as an important part of the digital product offering. Yet, until today, the market has largely been dominated by big passive players.
This year, we expect some of the more active players to start to enter the ETF origination market in earnest. Some will focus on developing more active ETF products. Others will focus on more specialist product offerings. One thing is clear: ETF markets have got further to go. The opportunities for asset managers to play a more active role are significant.
The outlook for wealth management is strong, driven by rising levels of private wealth and the threat of significantly underfunded retirement savings. Yet, while it is clear that demand for the industry’s core activities remains strong, our view suggests that – in the short-term – challenges related to current market uncertainty and volatility may start to dampen investor sentiment this year.
In the longer-term, we expect to see the industry start to fundamentally rethink the economics of its business and operating models to take advantage of new digital opportunities while also responding to growing demand for increased transparency. New digital-first and hybrid models will proliferate and, while they may not be disruptive in and of themselves, they will start to raise the bar for client experience and cost which, in turn, will drive increased competition in the industry.