The world is not so flat
The 2016 JP Morgan Asset Manager Survey
Findings from the Feb. 3, 2016, webinar on global distribution and product trends
In 2005, Thomas Friedman’s The World Is Flat painted the picture of a global economy where geographical distinctions would become increasingly irrelevant. As asset managers enter yet another year of change, many probably wish it were only that simple.
“The world is flat is no longer true,” says Chris Christian, a partner in the financial services regulatory practice at Boston Dechert LLP (Dechert).
“This notion that asset managers would just be able to sell cross-border product into Asia and elsewhere is quickly becoming a dinosaur.”
In early 2016, JP Morgan partnered with Dechert and the financial consulting firm FUSE Research Network to survey our largest asset management clients for their views on the trends that will shape their business in 2016 and beyond.
Eighty representatives from client firms attended, including chief operating officers and heads of marketing, product development and operations from US, European and Asian-based asset managers.
The findings, based on in-depth qualitative interviews and an interactive webinar in addition to Dechert and FUSE’s own proprietary research, showed a number of revealing patterns.
The asset management industry of tomorrow is likely to be both more global and more localized than it is today.
The winners will be those that can amass the scale, efficiencies and nimbleness to respond to the particular demands of distinct client bases spread across dozens of regional markets and regulatory jurisdictions.
Technological and demographic upheavals, too, are creating new challenges for the world’s largest asset managers, as well as opportunities for growth. As managers weigh their commitments to new product and mobile platforms, they grapple with which side of these historic shifts their firms will fall on.
Will they follow the example of companies in other industries that embraced the digitalization of their goods and services …or were rendered obsolete by it?
The ways that global asset managers are answering that and other questions make for a telling snapshot of the industry and potentially a roadmap for the future.
The top five potential distribution and product trends for 2016 identified at the webinar
1. The growth potential and considerable barriers to entry in Asia
• Although the US and Europe remain the primary focus, asset managers are increasingly drawn to the potential growth in Asia. Projections through 2019 from a survey conducted by the Boston Consulting Group (BCG) call for assets under management (AUM) in Asia to grow at 10% annually, more than twice the rate than in the US
• The age demographics are also compelling. It took 65 years (1950 to 2015) for seniors in Europe to increase to 24% from 12% of the population. Asia, where seniors currently represent 12%, is projected to make the same shift in just 33 years.
• But the upfront costs will likely be considerable, particularly in China, which is viewed as the market within Asia with the greatest upside. Based on our survey, many managers are concerned that restrictions on the ability to sell non-local product in China and Hong Kong will continue to restrain access to China’s $1trn fund market. A more likely path, suggest our survey results, is that managers will need to establish (and win Chinese recognition) for Hong Kong-domiciled funds or cultivate a presence in China itself via joint ventures. Patrick O’Brien, the Dublin-based head of JP Morgan’s fund services client strategy group, commented “you could be talking 10, 15 years” to build out a large footprint.
• Dechert’s Chris Christian highlighted that’s why his firm’s clients are looking at asset-gathering opportunities in geographic markets that may be easier to penetrate— like Latin America. While smaller in absolute terms, the LATAM market is growing significantly. Moreover, given the right product offerings, capital can be accessed relatively quickly through the privatized pension systems. As a result, managers may be able to introduce new products across multiple jurisdictions with (relatively) smaller investments in new infrastructure.
While 50.9% of managers say Asia represents the best asset-gathering potential over the next three to five years, 65.3% think they will need to establish a Hong Kong-domiciled fund to access Chinese retail investors, the largest single opportunity in the region.
2. The convergence of asset classes, investment approaches and types of managers
• The growth in Exchange Traded Funds (ETFs) (22% from 2013 through 2014 versus 10% for mutual funds) and alternatives (35% since 2012) continue to dominate asset managers’ product development strategies.
• But as FUSE’s Patrick Newcomb pointed out, the real trend is the continued emergence of more nuanced solutions that blur the lines between active and passive (see: the tripling in smart beta US AUM since 2010 to $586bn) and alternative and conventional products.
• This is partly a byproduct of regulatory reform, as new controls on broker-dealers have opened up opportunities for asset managers. The disintermediation of traditional bank credit structures and the related surge in direct lending products is a prime example.
• Each new hybrid product type can create its own complications behind the scenes. Which is why some argue that the more often managers keep functions like clearing and settling, reporting and prime brokerage under one roof, the easier it may be to find ways to streamline.
42.6% of managers think multi-asset solutions will experience the strongest growth over the next five years, followed by 35.2% who anticipate the biggest growth will be in passive and smart beta strategies, 14.8% in liquid alt and just 3.7% each in active and “other.”