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Business Comment

Mark McSherry: As banks come under pressure to play it safe, a new breed of asset managers look likely to step in and reinvigorate the world economy

Increasing regulatory pressure to restructure the banking sector will play into their hands

Asset management has for a long time been central to America’s position of importance in the global financial system, and the country’s money managers will have to take a more global view and be ready for massive changes ahead if they want to stay on top of the pile.

An extensive report last week by the consultants PricewaterhouseCoopers called “Asset Management 2020 – A Brave New World” provided a fascinating insight into the growth of asset management over the next six years, and the global opportunities that could exist for those money managers who are prepared.

The report said global asset managers have an enormous opportunity to play a central role in the world economy by filling a void that will be left by banks as they are forced by regulators to curtail their activities.

Assets under management will rise from $63.9trn (£38.3trn) this year to $101.7trn by 2020 at current rates of penetration – and could jump to around $130trn if asset managers are able to increase the percentage of the world’s pensions, sovereign funds, insurance funds and wealthy people’s assets they manage by about 10 per cent.

A new breed of global asset managers will emerge over the next six years – called mega-managers – to service the rise of “mass affluent” and “high net worth individuals” in other parts of the world, the fast growth of sovereign wealth funds, and the growth of defined contribution retirement funds.

“Increasing regulatory pressure to restructure the banking sector will play into asset managers’ hands,” said the report. “As the deleveraging of banks continues from 2013 to 2018, in part driven by the European Central Bank’s ongoing focus on stress-testing the balance sheets of Europe’s top banks, asset managers will continue to move into areas traditionally dominated by the banks.

“Alternative asset managers will continue to broaden their product  ranges to include primary lending, secondary debt market trading including distressed and nonperforming loans, primary securitisations and off-balance-sheet financing.”

Further, the report said: “Regulation imposed in the wake of the global financial crisis will continue to provide a hindrance to the banks and insurers by forcing them to abandon proprietary investing as well as other non-core businesses.

“The rising cost of capital will severely curtail the ability of banks and insurers to provide and recycle capital. We estimate that European banks alone have a capital shortfall of more than $380bn, amid the drive to deleverage.

“This will create a vacuum into which asset management will step and place itself at the centre of efforts to reinvigorate the world economy.”

The continued rise of Asia as an asset management centre will lead to what PwC calls “the likely internationalisation of the Chinese renminbi by 2020”.

In its report, PwC speculates that  global asset managers might report their earnings in 2020 denominated in the Chinese currency.

Over the next six years, asset managers’ clients will demand that a much higher percentage of assets will be invested in fixed income products, passively-managed funds, infrastructure, so-called alternative investments and private equity.

In a fictional earnings report from an international asset manager in 2020, PwC gives an example of what could become an asset manager’s portfolio in six years’ time – and it includes infrastructure projects in Laos and Guatemala, state pension plans in Ghana and Paraguay. And the earnings all denominated in renminbi.

The report stresses the opportunities for asset managers to work with policy-makers and sovereign wealth funds around the world as banks no longer play the roles and take up some of the projects they once did.

PwC said: “Asset managers will be at the centre of efforts by sovereign wealth funds to deploy and diversify their huge pools of assets. Approaches to the sovereign wealth funds market will evolve, becoming more sophisticated and more targeted.

“The rapid growth of sovereign wealth funds assets will provide a ready pool of assets to tap; however, the winning asset manager will need to focus on the different needs and types of sovereign wealth funds.

“They have diverse objectives, cultures, time horizons and risk appetites – specialist information on individual sovereign wealth funds is already sought by asset managers who aspire to be successful and established in this space by 2020.

“There is a clear opportunity for asset managers with sustainable, long-term capabilities to benefit from these trends. We believe that asset management will, by 2020, be widely viewed as an important part of the solution to the considerable challenges faced by policy-makers and the public alike. “

A major theme in the report is the rising importance of South America, Asia, Africa and the Middle East (Saaame) for asset managers.

These markets will provide opportunities for existing global asset managers to tap new pools of wealth and significantly expand their global reach, the report said.

However, it did warn: “But it will equally provide the backdrop for a number of fast-growing Saaame-based competitors to emerge and not only take on the global managers in Saaame regions, but in developed markets as well.”

PwC said that between 2010 and 2020, more than one billion more middle-class consumers will emerge globally, representing “the largest single decade increase in customers in history”.

Another challenge for established US asset managers is that social media and technology firms that are trusted by the public may try to muscle in on the lucrative business of managing other people’s money.

New entrants to the asset management industry from the tech and media sectors could disrupt a structure that has existed largely unchanged for several decades, said PwC.

“A potential source of disruption could come from social media or technology companies, which may combine their reach, knowledge and influence with banking alliances to provide compelling asset management propositions,” the report said.

A social media firm such as Facebook or Twitter could, for example, provide distribution services, and partner with a bank or buy a back-office servicing firm to create an asset management structure.

Equally, PwC said a payments servicing specialist such as PayPal could provide an operating model in the back and middle offices of asset management. PwC said this could happen because the general public “has high trust in big technology companies”.

The report concludes: “So asset managers will enjoy ample opportunities over the coming years, but these opportunities will also be sought by a growing and diverse set of competitors.”