In a brave new world

Karl Hairon, PwC Channel Islands, assurance partner, casts an eye over the propects for the Island's asset management industry

Recent research from PwC predicting that global assets under management will rise to around $101.7 trillion by 2020 from a 2012 total of $63.9 trillion provides good grounds for optimism here in the Channel Islands.

The report, entitled ‘Asset Management 2020: a Brave New World’, also finds that AuM in the SAAAME (South America, Asia, Africa, Middle East) economies are set to grow faster than in the developed world in the years leading up to 2020, creating new pools of assets that can potentially be tapped by the asset management  industry.

Given its strength and experience in the asset management industry and its focus on international relationships, we believe the Channel Islands are well placed to play a significant role in the positive story outlined in this major piece of global thought leadership.  The report provides a deeper dive into the impact of global economic, social and political mega trends on asset managers and is essential reading for all senior staff who need to keep abreast of changes in this industry’s landscape.

The report found that the global growth in assets will be driven by three key trends:

  • The substantial increase of mass affluent and high-net-worth-individuals in the SAAAME region.
  • The expansion and emergence of new sovereign wealth funds with diverse agendas and investment goals.  Sovereign wealth funds based in the Middle East and Africa will grow the fastest.
  • The increase in ‘defined contribution’ schemes, driven by government-incentivised or government-mandated shifts to individual retirement plans.

Asset managers will need to respond

PwC have identified six game changers that asset managers will have to analyse and address in order to capitalise on the opportunities this changing landscape presents:

  • Asset management has long been in the shadows of its cousins in the banking and insurance industries. By 2020, it will have emerged definitively from their shadows and move centre stage.
  • By 2020, four distinct regional fund distribution blocks will have formed which will allow products to be sold pan-regionally.  These are: North Asia, South Asia, Latin America and Europe. As these blocks form and strengthen, they will develop regulatory and trade linkages with each other, which will transform the way that asset managers view distribution channels.
  • By 2020, virtually all major territories with distribution networks will have introduced regulation to better align interests for the end-customer, and most will be through some form of prohibition on having the asset manager allocate to distributors as evidenced in the UK’s Retail Distribution Review (RDR) and MiFID II.  This will increase the pressures of transparency on asset managers and will have a substantial impact on the cost structure of the industry.
  • Traditional active management will continue to be the core of the industry as the rising tide of assets lifts all strategies and styles of management.  But traditional active management will grow at a less rapid pace than passive and alternative strategies, and the overall proportion of actively managed traditional assets under management will shrink.
  • 2020 will see the emergence of a new breed of global managers, one with highly streamlined platforms, targeted solutions for the customer and a stronger and more trusted brand.
  • Asset management operates within a relatively low-tech infrastructure. By 2020, technology will have become mission critical to drive customer engagement, data mining for information on clients and potential clients, operational efficiency and regulatory and tax reporting.  At the same time, cyber risk will have become one of the key risks for the industry, ranking alongside operational, market and performance risk.

The industry stands on the precipice of a number of fundamental shifts that will shape its future.  Strong branding and investor trust in 2020 will only be achieved by those firms that avoid making mistakes that attract the ire of investors, regulators and policymakers.  There is no single blueprint to building the successful asset manager of 2020 and beyond but they’ll have already started to shape their responses to these game changers.

The Channel Islands are well placed to address these issues and embrace the opportunities for a number of compelling reasons.  In particular, we’ve a long history of providing quality administration, audit, legal and regulatory support which means that we should continue to be a conduit through which capital flows as it’s deployed around the world.  

We should further build on these opportunities and services and ensure we get the message about what the Channel Islands can offer out to those with influence over the pools of new capital.  In addition, we’re going to continue to see regulatory pressures on managers in places like London, Switzerland and Luxembourg.  This could mean they’ll be looking for new places to operate, where the regulatory environment is much more conducive to managing assets.

However, we won’t keep up with pacesetters in this race without substantial foresight, courage and investment.  The Islands’ focus on the Alternatives sector and our reputation as premier finance centres only serve to gain admittance to the race.  

Thereafter, our ability to provide a platform of technology and expertise in data and systems, make us a contender.  Finally, making this platform understandable to, and trusted by, new entrants to the market and different global players will see us in with a real shot of winning against what is sure to be really stiff competition.

To download a copy of Asset Management 2020: a Brave New World, visit our website http://www.pwc.com/jg/publications