Asset Managers See Expansion Ahead

Shanny Basar

Nearly all the chief executives of asset management companies were confident of revenue growth both this year and over the next three years according to a PwC survey.

In a report, “Redefining business success in a changing world”, PwC surveyed 189 asset management chief executives in 45 countries. The survey found that 90% are confident of revenue growth in 2016 and 95% over three years. This confidence is despite some pessimism about the global economy.

“A PwC survey of asset management CEOs globally shows just 30% expect the global economy to improve in the next 12 months, down from 39% the previous year,” said the report. “What’s more, as they were surveyed before China’s slowing economy sparked a rout in global equity markets, this high level of doubt may have risen since.”

Due to this uncertainty, chief executives have turned to their traditional markets for growth and some appeared to have shelved plans to expand in China. “While 24% still see China as the most important market for them, this is far lower than 31% in 2014, a level the country had held for several years,” added PwC.

The survey found that 39% view the US as the most important market outside their country of origin this year, with 23% looking to Germany and 13% to the UK.

Most asset management chief executives, 86%, believed  ‘responsibility’ will play an important part in defining their success in five years and so they will prioritise long-term over short-term profitability. In addition 69% said they will report on both financial and non-financial matters, while 68% anticipate corporate responsibility being core to everything they do.

This month Larry Fink, chairman and chief executive of BlackRock, sent a letter on the importance of taking a long-term approach to creating value to S&P 500 CEOs in the US and to the largest companies in Europe and Asia Pacific that BlackRock invests in on behalf of its clients.

Barry Benjamin, PwC global wealth and asset management leader, said in a statement: “Big European investors, with nearly €13 trillion in assets between them, formed the Institutional Investors Group on Climate Change at the 2015 COP21 Paris climate change conference. From a fiduciary perspective, it’s becoming accepted that investors need to take into account climate change risks.”

In addition 85% of asset management chief executives are examining how they use technology to improve the stakeholder experience.

“This is a time of great opportunity for growth, yet asset managers need to become more innovative, leverage technology, manage a wider range of risks and use digital communication intelligently if they are to remain competitive,” added Benjamin. “In ten years’ time the sector is likely to be far bigger, but asset management companies will look very different from today.”

However consultancy Oliver Wyman warned in a report that although asset management firms have recovered well since the financial crisis, any external shock will hit profitability hard if companies do not adjust their cost base.

In “The Path Ahead – Redefining the Asset Management Operating Model”, Oliver Wyman said assets under management have grown at 8% per year since the global financial crisis, net revenues have risen and costs (as a percentage of assets) have been stable.

“However, despite a slight decrease in cost margin (from 16 to 15 basis points), overall cost has increased by $29bn (approximately one-third), now reaching a total of $119bn,” added Oliver Wyman. “Therefore, while the current average cost-to-income ratios of a little more than 60% look acceptable, any external shock may well hit asset management profitability hard if companies do not adjust their cost base.”

The consultancy continued that increased regulatory costs, inconsistent delivery of alpha performance and the secular shift to passive products will all influence profit margins in the coming years.

Oliver Wyman said global asset managers should focus on five key imperatives – recognising data as a competitive advantage; embracing the digital opportunity; improving the management of IT investments; re-evaluating outsourcing priorities and redefining the role of the execution professionals.

“To achieve success in the new world, firms will need to exploit the expertise and capabilities of their trade execution professionals, especially given the impact of regulatory changes on the financial services industry and the potential liquidity issues asset managers may face in the coming years,” said Oliver Wyman.

Featured image via taa22/Dollar Photo Club

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