Emerging middle class promises bumper payday for asset managers
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Many asset managers describe their businesses as global because they invest in financial markets across the world. Yet not one has succeeded in building a truly global client base that can rival those of leading technology companies such as Google and Amazon.
Building a client base in emerging markets requires international investment managers to confront myriad legal and regulatory obstacles that can pose a threat to expansion plans.
Yet the prize for doing so is potentially huge. The growing size and prosperity of the middle classes across many emerging markets offers a tantalising reward to those managers that can address the needs of institutional clients and retail investors in these countries.
“The investment industry is a natural beneficiary of the growth in wealth and savings among the middle classes in emerging markets,” says Kunal Desai, a portfolio manager with Mobius Capital, a London-based specialist emerging market boutique. “But it tends to get overlooked in favour of sectors that are seen as more obvious winners, such as consumer goods.”
Investor assets managed in the Asia-Pacific, Latin America, Middle East and Africa regions will increase from about $16.1tn at the end of 2016 to $38.5tn by 2025, according to PwC, a professional services provider.
Olwyn Alexander, a partner at PwC, says profiting from this rise requires cultural change. “Historically, there has been a lack of an investment culture in many emerging markets,” she says. “But even a small shift can present significant opportunities given the magnitude of the populations in some of these countries.”
New money expected to flow into the fund industry in India over the next decade
Asset managers need to ensure they can cater to younger investors, Ms Alexander says. “Asset managers will need technology capabilities to process large numbers of small dollar value transactions from mobile devices,” she adds.
Among the fastest-growing managers in Asia, local and international, two common traits stand out. All are making big bets on China and have invested in new digital services to attract the growing middle class’s rising wealth. A successful marriage between technology and asset management is exemplified by Yu’E Bao, a fund created as a repository for leftover cash from consumers’ online spending accounts by the Chinese company Ant Financial in 2013. Yu’E Bao has grown into the world’s largest money market fund with more than 400m users.
“The big fintechs are aiding China’s shift to a cashless society,” says Jacob Dahl, a senior partner at McKinsey, based in Hong Kong. “How asset managers position themselves to serve these digital platforms will be critical, not only in China but also in other Asian markets where fintechs are gaining ground.”
China, which is on course to replace Europe as the world’s second-largest fund market behind the US, provides the single largest growth opportunity for global asset managers over the next decade.
The country’s mutual fund assets could multiply fivefold to reach $7.5tn by 2025, creating a fee pool worth $42bn a year, according to UBS. “But it all depends on the progression of reform and deregulation,” says Kelvin Chu, an analyst with UBS.
In India, a decade of consistently strong economic growth has helped to accelerate the rise of the middle class. The National Council of Applied Economic Research, a Delhi-based think-tank, has forecast that this group will number 547m people by 2026, from 267m in 2016.
India’s government has implemented a series of reforms that have significantly boosted inflows into fund management. “We estimate that around $420bn in new money from domestic investors will flow into the fund industry in India over the next decade,” Mr Desai says. “This compared with around $180bn from both domestic and international sources over the past 10 years.”
Managers should be careful not to overlook Indonesia, Malaysia and Thailand, Mr Dahl says. “We expect assets under management in these markets to nearly double over the next five years from a collective $600bn today,” he says.
Across Asia as a whole, close to 90 per cent of financial assets sit outside the control of asset managers, with the industry overseeing a far lower share than in Europe or the US, according to McKinsey.
However, rising numbers of billionaires in Asian countries, the further growth of large government-sponsored sovereign wealth funds and the development of private pension systems to meet the needs of rising numbers of savers should all provide new sources of growth. “The Asia asset management revenue [fee] pool stands at around $66bn today and we expect this to [reach] $112bn by 2022,” says Mr Dahl.
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