Factor in the high potential of rich and ageing markets like Japan and Australia, and the appealing demographics of South-east Asia — not to mention the region’s rising wealth, interconnectedness and technological savviness — and it is clear that Asia’s long-term potential for the asset management industry is unparalleled.
Indeed, in a straw poll of global fund managers conducted by the FT Confidential Research team and ANZ in mid-2016, three-quarters of respondents said they expected to increase their on-the-ground presence in Asia, despite concerns around regulatory restrictions, political uncertainties and the need to partner with onshore affiliates to access local markets.
Growing private wealth
Rising private wealth is likely to account for a large share of new business in Asia. Growth in private wealth in the region has consistently outpaced North America, Europe and the Middle East, rising 13% in 2015 to US$37trn, against growth of less than 2% for North America, according to the Boston Consulting Group. The greatest prospect is clearly China, where by mid-2016 there was a supply of pent-up wealth worth an estimated Rmb146tn ($22.2tn).
Winning mandates to manage this wealth may not translate into higher profits, particularly for global asset managers competing with local private wealth managers prepared to spend more to win market share. Recent research by BCG showed pre-tax profit margins in Asia-Pacific wealth management institutions are around 21 basis points, versus around 25-26 basis points in Europe.
Nevertheless, Asian private wealth represents a compelling opportunity given much slower growth expected in net new flows from “legacy” asset owners in Asia, such as state sponsored pensions, sovereign wealth funds and Japanese retail investors. Casey Quirk predicted that local retail investors and private banks would account for 63% of the US$4trn in net new flows from rising segments in the region by 2020, whereas legacy segments would add US$1.1trn.
The slower outlook for legacy segments is partly because of the greater propensity among some asset owners to insource asset management, as well as the demographic realities facing markets like Japan and South Korea. This compares to tailwinds in rising segments generated by a massive, growing and underserved middle class in emerging Asian economies like China, as well as regulatory changes prompting greater use of money management services in savings vehicles like defined contribution pensions and life insurance.
Regulatory harmonisation is also likely to help drive demand for retail and individual asset management in Asia in the short to medium term. The rollout of regional fund passporting schemes, which allow the distribution of mutual funds and other products approved in one market in other signatory countries (discussed in more detail in a future article in this series), should help accelerate the rate at which Asian retail investors move their money out of cash, equities and bonds, as the availability of managed products widens.