Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Asia Pacific to lead growth in asset management ‘revolution’
Asia Pacific will lead the other major regions for growth in assets under management over the next five years, according to study by PwC. Asia Pacific growth will outpace that in Europe and North America in both best and worst-case scenarios.
The study, ‘The Power to Shape the Future – Asset and Wealth Management Revolution,’ highlights three themes for the coming years. They are:
- Funding the future: Asset and wealth management (AWM) firms can channel capital and target investment opportunities to lift economies out of recession and sustain superior fund returns
- Providing for the future: By delivering risk-adjusted returns, firms can help people meet their savings goals and bridge pension gaps in the face of economic fragility, ultra-low interest rates and a squeeze on government health and welfare budgets, and
- Embracing ESG as the future. For some investors, financial return will remain the sole priority. However, a growing number of investors expect AWM organisations to make ESG issues integral to their investment strategies. This shift is already having a revolutionary impact on product design, fund allocation and performance objectives.
The report says: “Endeavouring to rethink your organisation’s purpose across these three critical priorities to make social and financial returns symbiotic is only the beginning of the road ahead. It’s also time to repair your operations to bring them up to the competitive baseline and reconfigure your investment strategy and organisational capabilities to deliver on a new mission. The final part of the equation is to report on how your business is changing and the progress you’re making against your goals. In this report, we will advise you on how to undertake each of these four critical actions.”
PwC predicts that overall growth of assets under management will slow significantly compared with the past five years and the fastest growing regions are currently the minnows of Latin America and the Middle East. The two smallest regions in terms of assets also may struggle to achieve what the report predicts will be required by winners in terms of ESG integration compared with Europe and North America in particular, but also Asia Pacific (thanks largely to Australia).
Global assets under management grew by 40 per cent in the past five years to US$110 trillion, which is more than 20 times the US federal budget. Institutional investors account for the biggest segment, with 40 per cent of total market capitalisation. In the US, the largest single market for assets, institutional investors account for 72 per cent. This gives you an idea of the power they can wield over companies, especially as the ESG trend continues to gather momentum.
Much of the difference in growth rates between the best and worst scenarios will depend on China, the country with the most potential growth in asset management. PwC says: “China is emerging as the ultimate prize, reflecting its size, room for further growth and the opening up of the market there to wholly owned foreign entities.”
The report’s forecasts are split between worst, base and best-case scenarios. The slower global growth expected in each case over the five years to 2025 is most pronounced in Europe and the US. Latin America and the Middle East and Africa will grow faster, followed by Asia Pacific, but off a very small base.
Assuming its ‘base case’, the study says Asia Pacific will grow by 7.4 per cent to US$26.2 trillion, North America by 3.7 per cent to US$69.4 trillion and Europe by 2.8 per cent to US$37.1 trillion. Latin America will grow by 11.8 per cent to US$4.8 trillion and Middle East and Africa by 8.4 per cent to US$1.6 trillion.
The best-case scenario of Asia Pacific is a growth rate of 9.3 per cent and a worst-case of 7.4 per cent. Best case for North America is 4.8 per cent (worst case 2.5 per cent) and Europe 3.6 per cent (2.1 per cent).
On a base-case basis, sovereign wealth funds are expected to grow the fastest in the categories of asset sources, with 5.0 per cent annualised between 2020-2025, followed by pension funds (4.6 per cent), high net-worth individuals (4.2 per cent), mass affluent (4.1 per cent) and insurance assets (3.9 per cent).
