PwC predicts that global assets under management will almost double in size to reach USD145.4 trillion by 2025.
The report, entitled ‘Asset & Wealth Management Revolution: Embracing Exponential Change’, also warns that firms need to take action now, if they’re to survive an exponential level of change.
Global assets will grow by over 6.2 per cent a year, from USD84.9 trillion in 2016 to USD111.2 trillion by 2020, and then again to USD145.4 trillion by 2025, according to the report.
PwC estimates that Europe’s share of global assets will grow at 8.4 per cent a year from 2016 to 2020, slowing to 3.4 per cent between 2020 and 2025, lifting assets from USD21.9 trillion to USD35.7 trillion over the nine years.
The report states that while active management will continue to grow and play an important role, reaching USD87.6 trillion by 2025 (60 per cent of global AuM), PwC predicts growth in passive management to reach USD36.6 trillion by 2025 (25 per cent of global AuM).
Alternative asset classes – in particular, real assets, private equity and private debt – will more than double in size, reaching USD21.1 trillion by 2025, accounting for 15 per cent of global AuM as investors diversify to reduce volatility and target specific return and risk outcomes.
The burgeoning wealth of the mass affluent and high-net worth individuals, as well as a pronounced shift to defined contribution retirement saving, are propelling huge growth in the asset & wealth management industry, the report says.
The asset and wealth management industry is set to manage a greater share of global retirement and pension funds, according to PwC. If current growth is sustained, the percentage of global wealth managed by the industry will expand from 39.6 per cent in 2016 to 42.1 per cent by 2025.
Retail (mutual) funds (including ETFs) will see their assets almost double by 2025, with institutional mandates expanding similarly.
Olwyn Alexander, PwC’s global asset & wealth management leader, says: “Asset managers can take advantage of this massive global growth opportunity if they’re innovative. But it’s do or die, and there will be a ‘great divide’ between few have’s and many have not’s. As a result, things will look very different in five to 10 years’ time and we expect to see fewer firms managing far more assets significantly more cheaply.”
Active investments will continue to lose market share to passives and alternatives, but AuM will increase across all three lines, the report predicts.
“Active, passive and alternative strategies are becoming building blocks for an investor’s diversified investment portfolio. 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 USD60.6 trillion in 2016 to USD87.6 trillion by 2025, but their share of overall global assets under management will decrease from 71 per cent in 2016 to 60 per cent by 2025. Passives will gain huge market share, rising from 17 per cent of AuM in 2016 to 25 per cent in 2025, while alternatives rise from 12 per cent to 15 per cent. Passives’ AuM will more than double, from USD14.2 trillion to USD36.6 trillion; alternatives from USD10.1 trillion to USD21.1 trillion.”
Elizabeth Stone, UK asset and wealth manager at PwC, says: “While we anticipate a faster pace of growth for passives, we still predict growth in active investment. Active investment is growing at a slower rate, but it is still growing and retaining a dominant share of the market.
“It is important to remember that passive returns at a low cost are very attractive in a rising market but this industry has not yet been truly tested by the market. When it occurs, an inevitable market correction will underline a continued appreciation for the value of active investments. We are optimistic about active and passive investing and both will be key building blocks as the industry looks to achieve the best outcomes for its customers through tailored investments. Future success will lie in the way they work together to achieve this.”
The report says that as governments across the world increasingly rely on individual retirement accounts and defined contribution plans to help people save for retirement, asset and wealth managers are filling the financing gaps.
“As governments step back, helping individuals to prepare for old age is a new opportunity for the investment industry to achieve profitable growth. Expansion in these assets as the world’s population grows and life expectancy rises is one of the main forces driving PwC’s optimistic forecasts for growth in assets under management.
“PwC predicts investment firms will provide capital in areas such as trade finance, peer-to-peer lending and infrastructure. They will be more active in all aspects of lending activities traditionally undertaken by banks, e.g. arranging a syndicate of investors for large infrastructure projects.”
PwC also anticipates soaring growth in real assets – mainly infrastructure and, to a lesser extent, real estate, private equity and private credit. Over the four years from 2016-2020, PwC forecasts a 27.5 per cent per annum growth rate in infrastructure, slowing to 15 per cent from 2020-2025. Infrastructure assets will expand more than fivefold, from USD0.6 trillion in 2016, to USD3.4 trillion in 2025.
Rob Mellor, PwC asset management partner, says: “We have seen the rise of the multi-strategy alternative manager and an increasing trend for traditional active managers looking to add alternative strategies to their product range; all of this is driving an appetite for M&A activity in the alternative asset management space.”
Asset managers need a keen eye for the technological developments driving exponential change and machine learning and AI is already changing the way research and investment decisions are made, according to the report. Robotic Process Automation will revolutionise the back and middle office, while blockchain could have a profound impact on the services industry.
Elizabeth Stone says: “There is a divide between asset and wealth managers who have acted to ensure they are fit for growth, and those who have not. To realise the growth we predict, the industry must act in three areas. First, asset and wealth managers should reorganise their business structure to support their priorities and specific capabilities, and cut costs elsewhere. Second, every firm must embrace technology, as it impacts all functions and will determine if they win or lose in this fast-changing landscape. And thirdly, different skills are needed, backed by new employment models and a changing customer base. Finding, nurturing and retaining the right talent will be absolutely vital as the industry reinvents itself to reflect its widening customer base.
“The UK market is facing its own set of headwinds, including uncertainty around Brexit and the upcoming implementation of MiFID II regulation. Nonetheless, the UK remains the largest asset and wealth management centre in Europe and will continue to flourish as a key part of this global growth across the industry.
“The predicted growth in North America, Asia and Latin America will be of utmost importance to the UK industry as it seeks to strengthen its global relationships with emerging markets in a post-Brexit world. This will require an open business environment to be maintained post-Brexit in order to ensure the future success of the global industry – of which the UK is a key player.”