The asset management industry is at the crossroads of enjoying rising markets and growing pools of capital to manage, and navigating significant disruption, changes and pressures from all sides. Taking the right path and making the right choices to adapt, evolve and transform will distinguish winners from losers.
As we look at it today, there are three game changers that are fundamentally changing the landscape for this industry. How the asset and wealth management firms respond to these will likely determine their success in the next 5 -10 years.
Exchange Traded Fund (ETF) assets are already bigger than hedge funds and index tracker funds, and are expected to overtake mutual funds within the next 10 years. Currently the global ETF market is at US$5 trillion and is expected to more than double in the next 5 years. The fact that European ETFs currently only account for 5 percent of the mutual funds market, coupled with their potential for disruption; leads us to believe that the asset gathering opportunity is even greater.
The traditional asset management industry is at an inflection point. Regulatory scrutiny around value for money and transparency, disruptive D2C technology and new investor preferences, necessitate that firms adapt and innovate if they are to flourish in the new order.
In a bid to thrive in this new world, entities across the asset management ecosystem are embracing a piece of open source technology they can use to reboot their business models and meet these challenges head on.
Historically it is true that ETFs have become successful as very efficient vehicles for passive strategies. But the world has changed and there are a growing number of active ETFs being launched. It is not true that ETFs are only for passive strategies.
And there are other changes too that make a compelling case for all asset managers to look at launching ETFs.
First, there are rapidly growing markets where ETFs are the vehicle of choice. They fit well with digital technology used by Roboadvisers. They work well as efficient building blocks for asset allocation solutions and model portfolios in the wealth management industry and in the increasingly important self-directed market. Maximum success in these channels means delivering strategies via the ETF vehicle.
A recent survey conducted by KPMG showed that wealth managers are increasing their use of ETFs in client portfolios, with 80 percent wealth managers saying they are already using ETFs and 50 percent saying they are planning to increase their use of smart beta.
Secondly, the ecosystem of operating platforms and service providers has developed and expanded in such a way that the cost to launch and run an ETF range is significantly lower today than it was 5 years ago. The argument that it is too late and too expensive to enter the market players is not true. ETFs should be viewed not as a standalone business, but as the technology to revitalize existing strategies and open up new distribution channels. They are an enabler of asset manager business strategies not a threat.
As of today, only 2 percent of European AMs have an ETF capability. In the next 5-10 years, I think the majority will. ETFs will become Mutual Funds Version 2.0.
China's asset management industry came into being 2 decades ago and it is now one of the last green fields of opportunity in the country. In the last few years, China has made sweeping policy changes designed to open up the sector. Two or three years from now, we will likely see global asset managers and Chinese asset managers compete on a more even playing field in the Chinese market.
Closer linkages with the rest of the world will promote the growth and efficiency of the local capital market as well as the fund industry.
KPMG expects the industry to grow at a double digit rate, year on year, over the next 15 years.
In 1998, six Fund Management Companies (FMCs) managed US$1.27 billion, while today 132 firms manage US$2.0 trillion of funds. KPMG forecast USD$5.6 trillion of assets under management in China by 2025, which would make it the second-largest asset management market in the world.
China's economic growth is creating personal wealth among the population, who have become increasingly sophisticated consumers of financial products. At the same time, institutional investors - including sovereign wealth funds, insurers, pension funds and endowments - are not only growing in size, but also looking for more professional management for their assets. The definition of the industry has broadened to include a wider range of participants such as private fund managers, securities firms and the asset management arms of banks and insurers. Both individual consumers and institutional investors, therefore, prompt the asset management industry to innovate in product design, channel development and operational capabilities. The range of products evolved too, and more money is going into equity, fixed income, balanced funds and alternatives, as well as ETFs.
China's markets are reaching out to the outside world, creating opportunities for FMCs to provide an international platform for their clients and a more globally efficient way of buying assets. In April 2018, the Chinese government announced new rules to allow foreign managers to own 51 percent share in joint ventures. In 3 years, a foreign manager will be able to own 100 percent.
At the beginning of 2018, China resumed its Qualified Domestic Limited Partnership (QDLP) scheme, which allows foreign alternative managers to raise money in China for investment overseas, after a 2 year hiatus. Two months later, the Qualified Domestic Institutional Investor (QDII) program, which grants domestic retail and institutional investors quotas to buy overseas stocks and bonds, was also resumed.
Running in parallel to these developments is changes to ownership rules. Foreign fund houses can now set up wholly foreign-owned enterprises and conduct onshore business.
A removal of limits on the business scope of joint ventures is also in the offing, which will give foreign asset managers the ability to control their joint ventures in China.
In 2 or 3 years from now we should see global asset managers and Chinese asset managers compete on a more even playing field in the Chinese market.
The government has changed the investment restrictions in the pension funds to allow equity, alternatives and offshore assets. The Chinese government is introducing tax incentives to encourage participation in third pillar pension plans, and have restructured state-run schemes -- particularly the role of the National Council for Social Security Fund (NCSSF), actively seeking foreign input and collaboration. Pension assets in China have soared from US$180 billion in 2005 to US$1.5 trillion in 2017, which would continue due to significant growth opportunities for foreign managers.
The industry needs to truly embrace responsible investment and embed Environmental, Social and Governance (ESG) criteria into the investment process.
The level of trust in the asset management industry is lower than that of banks and insurers. That is not where we should be or where we want it to be, and it will take actions at many levels and over a long period of time to change this position.
One important part of restoring trust is for the industry to be much more wholehearted and convincing in embracing responsible investment and embedding ESG factors into the investment process.
The next generation of retail, pension fund and institutional investors want to see their capital being used to create an impact and contribute to a better world. Millennials, who are moving into more influential roles, commanding higher salaries through their new skillsets and are inheriting wealth from previous generations, relate very strongly with responsible investment and ESG. The asset management industry, along with all others, needs to adapt to a very different type of customer.
Consumers, governments and the media alike seek conviction from this industry to showcase that it is capable of strengthening the economies. The long path toward restoring trust needs to be travelled -- not doing it or not doing it properly would only risk damaging the trust factor further.
Responsible investment and ESG are no longer specialist niche themes; they are here to stay and will fundamentally change the way we measure return, identify investment opportunities and manage risk. It is critical that asset managers embed ESG into their portfolio management, risk management, management information and governance processes and can demonstrate to their clients and to regulators that they are doing what they say they are doing. It's not about window dressing; companies needs to embed responsible investment and ESG into their strategic, tactical and operational decisions - companies need to take these topics to more strategic and actionable levels.
If you would like to discuss our findings in more detail, plesae contact your local KPMG advisors.