Asset & Wealth Management Revolution Embracing Exponential Change

Transcription

1 Asset & Wealth Management Revolution Embracing Exponential Change October 2017

2 Embracing exponential change AWM must act now and focus on strategy, technology and people The tail wind of rising asset prices, growing AuM, and stable fees that has prevailed for more than 20 years is being disrupted by seismic changes. Since the GFC, the forces of regulation, technology, and fierce competition have begun to usher in transformational change. This period of reinvention will accelerate rapidly in the years ahead, forcing the industry to reimagine itself. Things will look very different in five to ten years time. Fewer firms will manage far more assets significantly more cheaply. Technology will be vital across the business. And, some firms will have discovered new opportunities to create alpha, and restore margins. 01 Strategy AWM managers must be more efficient and entrepreneurial. They must have a clear strategy and know their differentiating capabilities. As befits a time of great change, they must have a long view, take radical steps, and invest in building their businesses strategically. Time to take action is now 02 Technology Every firm should embrace technology in order to navigate the fast-changing landscape. Artificial intelligence, robotics, big data, and blockchain are transforming the industry. Technology will determine which firms are the winners in a fastchanging landscape. 03 People The AWM industry needs to readjust to ensure optimum advantage. Old ways of hiring and nurturing people are changing. Hiring and retaining the best will depend more than ever on diversity and inclusion, and meeting the needs of the whole person. Talent is a global challenge. The workplace of the future will differ greatly from that of the recent past, or even today. Different skill sets will be needed, such as data analytics and innovation, as well as client centricity. 2

3 How can help? has an extensive expertise with helping clients transform their businesses In line with the actions outlined in the report, AWMs will have to reinvent themselves and focus on strategy, technology, and people. 01 Strategy The Fit For Growth approach can help companies align cost structure and reorganise performance. s strategic expertise in cost cutting and restructuring has helped top companies to adapt to emerging challenges. Our wide- range crossindustry experience delivers transformational results. Time to take action is now 02 Technology We provide a broad range of services including strategic advice as well as co-creation and customer journey workshops. We help companies identify the digital capabilities that best align with their overall business strategy. We then support them in increasing the efficiency and effectiveness of their technology through digital strategy. 03 People One of the key differentiators is having a clear, measurable, and executable people strategy. helps clients connect their business strategy with the people needed to deliver it, ensuring an agile framework across the whole employee lifecycle. 3

4 Executive summary (1/4) Global AuM to grow rapidly and reach USD 145 tn in 2025 Asset and Wealth Management Revolution: Embracing Exponential Change provides insights on the AWM industry and displays actual AuM and client asset data for and forecasts for 2020 and The forecasts are based on a continuation of the post-crisis recovery, the normalisation of monetary policies across developed markets, and a stable growth rate in China. After growing rapidly between 2012 and 2014, the AWM industry made a U-turn in 2015 and recorded its worst performance since the GFC. Nevertheless, the combined effects of recessionary pressures and currency depreciations felt in 2015 are progressively fading away and figures for 2016 indicated an ongoing recovery. Emerging markets as well as Europe have shown signs of economic recovery and many currencies have appreciated against the USD in 2016/2017. We project stronger growth resulting in considerably more global AuM which should reach USD 111 tn by 2020 and 145 tn by Emerging middle classes in developing markets, growing saving through mandated pensions and auto-enrolment, as well as widespread GDP growth across the world are the leading factors for the growth in AuM. In terms of asset classes, alternatives and passive investments are growing the fastest; but growth in active investments is also relatively resilient. With interest rates rising, but still well below historical averages, we expect to see strong growth in traditional and alternatives investments in On the client side, pension funds and SWFs are expected to grow but to increasingly manage their assets internally. This trend could be compensated by the strong growth in HNWI and mass affluent assets that will positively impact AWM Total client assets and total AuM in USD trillion e 2025e Total Client AuM Global AuM Source: Market Research Centre analysis Past data based on Lipper, ICI, Preqin, Hedge Fund Research, EFAMA, City UK, Insurance Europe, Financial Stability Board, Credit Suisse, Towers Watson, OECD, and World Bank 4

5 Executive Summary (2/4) Four trends that will transform AWM industry Future of AWM: Four transforming trends New regulations, real-time data, and analytics are making financial markets more transparent. Increased competition and new entrants are disrupting traditional value chains. Larger players benefit from scale economies, and we expect that there will be further industry consolidation. AWM have been filling the funding gaps that have emerged since the GFC. They have been first movers and innovators, providing capital for real asset classes. Equipping individuals to save for old age, as governments step back, will also support growth in AuM Key market dynamics Technology advances will accelerate and drive changes across the value-chain. Technology giants might also enter the sector in developed markets, becoming gatekeepers and flexing their distribution power. Artificial intelligence, robotics, big data, and blockchain are transforming the industry. Active, passive, and alternative strategies are becoming building blocks for multi-asset, outcome-driven solutions. Demand for passive and alternative strategies will grow fast. While active management will play an important role, its growth will be slower. 5

6 Executive Summary (3/4) Global AuM in USD trillion Products e 2025e CAGR e Global AuM % Mutual funds* % of which active investments % of which passive investments % Mandates % of which active investments % of which passive investments % Alternatives % Source: Market Research Centre analysis Past data based on Lipper, ICI, Preqin, Hedge Fund Research, Lipper, and EFAMA *Mutual funds include ETFs. Passive ETFs AuM should reach around USD 10tn by 2025, up from USD 3.5tn in 2016 Note: Mandates include Separately Managed Accounts, discretionary mandates, advisory/discretionary accounts, and pension asset mandates 6

7 Executive Summary (4/4) Clients assets in USD trillion Clients e 2025e CAGR e Pension funds % Insurance companies % Sovereign Wealth Funds % HNWI % Mass affluent % Total Client AuM % Total AuM % Penetration rate 30.9% 37.2% 36.5% 39.6% 39.8% 42.1% 0.7% Source: Market Research Centre analysis Past data based on Lipper, ICI, Preqin, Hedge Fund Research, EFAMA, City UK, Insurance Europe, Financial Stability Board, Credit Suisse, Towers Watson, OECD, and World Bank Note: Penetration rate is defined as assets managed by Asset and Wealth Managers (AWM) by AuM over total assets held by clients 7

8 Landscape 8

9 Global AuM by type in USD trillion Set for rapid, if uneven, growth USD tn Our projections foresee AuM growing from USD 84.9tn in 2016 to USD 111.2tn by 2020, and to USD 145.4tn by The forecasts are based on a continuation of the post-crisis recovery, the normalisation of monetary policies across developed markets and a stable growth rate in China. Personal wealth is quickly accumulating, mainly in developing countries, while pension funds assets grow as governments shift from pay as you go to funded pension schemes. The industry is set to manage a greater share of this wealth as people will increasingly entrust financial assets to professional managers % % % e 2025e Mutual funds Mandates Alternatives 7.0% 8.5% 7.1% 6.4% % 8.7% 5.0% 5.0% Sources: Market Research Centre analysis Past data based on Lipper, ICI, EFAMA, the City UK, Hedge Fund Research, UBS, and Preqin 9

10 Global AuM by region in USD trillion Highest growth rates in Asia and Latin America USD tn We anticipate assets growing at 5.7% a year in North America from 2016 to 2020, slowing to 4.0% from 2020 and Europe is projected to grow at 8.4% and 3.4% and Asia-Pacific at 8.7% and 11.8% respectively over the two periods. Developed markets should be boosted by moderate interest rates and brighter economic outlook in , but in growth figures will be moderated by rate hikes and deflating assets. On the other hand, markets may accelerate further in as growth in these economies is set to prosper and as we see the rise of the middle class % % % % 16.8% % % % % e 2025e 7.0% % 9.5% 10.4 % 3.4% 11.8 % Asia-Pacific Europe Latin America Middle East and Africa North America Sources: Market Research Centre analysis. Past data based on Lipper, ICI, EFAMA, City UK, Hedge Fund Research, and Preqin 10

11 Global assets by client type in USD trillion Personal wealth will accumulate fast, pension assets, and SWF growth will rebound USD 345tn The current economic recovery and currency appreciations against the USD will significantly boost asset growth at 6.8% until 2020, before slowing down to 4.3% over the next period ( ): Pension funds, insurance companies, and SWFs will lead the growth until 2020 with growth rates at 6.9% or above. HNWI assets should grow faster than mass affluent s wealth until 2025 and could be helped by tax cuts and accommodative policy in major markets (e.g. US, France) % % % 1.9% % 9.7% % % % % % % % % 4.0% e 2025e Pension funds Insurance companies Sovereign Wealth Funds HNWI Mass affluent Source: Market Research Centre analysis Past data based on: EFAMA, City UK, Insurance Europe, Financial Stability Board, Credit Suisse, Towers Watson, OECD, and World Bank 11

12 Pressure intensifies from all angles Transparency becomes absolute Margins are squeezed Managers scramble for scale Uncertainty persists The growth in popularity of passive funds is putting pressure on asset managers to reduce fees. When combined with a shift to outcome based solutions and the expanding market share of passive strategies, this is relentlessly driving down the overall revenue pool. Increased regulatory scrutiny on asset managers (e.g. MiFID II, DOL Fiduciary Rule, RDR) which will prevent asset managers from paying commissions for advice is putting pressure on AWM industry revenues. To gain scale, several international asset managers are merging. Some asset managers, mainly in Europe, have been acquiring wealth managers as they seek to control distribution. This also helps to protect margins, but may not be a long-term solution as regulation increasingly focuses on open-architecture distribution and pushes wealth managers towards greater disclosure and a fiduciary standard of care. A holistic approach such as Fit for Growth would be essential for these companies, eliminating wasteful spending and investing in capabilities that will differentiate them. Geopolitical tensions and the recent wave of populism, anti-globalism, and protectionism that has swept across Europe and North America represent a new set of risks for AWMs. In the US, the new administration has committed to grant some relief to the regulations that have proliferated since the GFC, but this remains a future prospect. Brexit is causing further uncertainty. Depending on the result of the negotiations, there may be issues for European Asset managers selling into the UK and for UK Asset Managers selling into the EU. 12

13 Pressures intensify from all angles As fees fall, margins are squeezed Asset managers have seen profits declining by around 10% since the GFC. We estimate that margins vary globally from as little as 5% for a small retail asset manager up to 60% for some of the world s largest institutional managers. However, the industry s profit margins remain significantly higher than in most other industries New regulations (e.g. MiFID II, DOL Fiduciary Rule) as well as shift towards outcome-based solutions will put further pressure on profitability. Passive funds are increasingly more popular. This together with emergence of automated advice (robo-advisors) solutions puts further pressure on fees in the AWM industry. In Europe, between 2011 and 2016, 80% of active equity funds failed to surpass their benchmarks, leaving investors disappointed. This led to increased regulatory scrutiny on AWM margins Expense Ratios of Actively managed and Index Mutual Funds in the US (percent) Actively managed equity funds Actively managed bond funds Index equity funds Index bond funds Sources: Market Research Centre and ICI 13

14 Managers scramble for scale New breed of global managers To gain scale, several international asset managers merged, including Janus Capital Group and Henderson Group, Standard Life and Aberdeen Asset Management, and Amundi and Pioneer Investments. Deal Date Companies involved Total AuM USD bn Merger July ,109 Acquisition August * Merger August Merger May *Estimated value Source: Market Research Centre, Financial Times, FN London, and Investment Europe 14

15 Uncertainty persists Brexit in focus: Substance requirements continue to be unknown Second largest AM industry worldwide The UK Asset Management industry is the largest in Europe and second globally in terms of AuM. Despite the GFC, it registered a 6.7% CAGR from 2007 and Number of firms with at least one financial services passport to and from the UK by investment services legislation, ,250 Not much progress was made in this September s round of negotiations but the idea of a transition period is starting to take hold in UK. MiFID AWM with passports from the UK to the EU 988 Substance requirements for UK Asset Managers in Europe and EU Asset Managers in the UK are still to be agreed upon but the EU is expected to take steps to prevent regulatory arbitrage. 212 AWM with passports from the EU to the UK AIFMD 45 Heavier substance requirements will increase costs and add further pressure on margins. 32 Uncertainty around potential dislocation London s interconnectedness with Europe s financial centers remains paramount for the AWM industry. UCITS 94 The loss of passporting rights will mostly impact UCITS funds. Asset managers are considering possible locations for their EU base, Frankfurt, Dublin, Paris, and Amsterdam being the most popular. This could mean jobs and financial clout moving out of London. 38% of assets managed in the UK are managed on behalf of overseas clients. Sources: CFA Institute, ECMI, Europe Economics, and The Investment Association 15

16 Four transforming trends Buyer s market 16

17 Buyers market Regulators and millennials are changing the rules of the game Retail fees fall Institutions dissect alpha and beta Millennials shun traditional wealth management Taxes a trust issue MiFID II bans asset managers from paying retrocession commissions to wealth managers. DOL Fiduciary Rule reinforces the pressure on disclosures. Future of Financial Advice is a legislation introduced in Australia in 2013 which banned conflicted remuneration structures. The proliferation of indexes and of smart beta has given institutional investors the tools to customise portfolios to their needs. The market is differentiating where asset managers add value, allowing institutional investors to better achieve their investment goals. Millennials will increasingly turn to automated wealth management solutions. Robo-advisers are reducing the need for human advice and increasing the use of passive funds for asset allocation. Common Reporting Standard is being introduced from 2016 to 2018, and outsources responsibility for reporting on tax affairs to financial institutions. Transparency and compliance with tax laws will become more and more important for AWM brands. 17

18 Retail fees fall Regulators are forcing the pace MiFID II (2018): European Union has banned retrocessions through MiFID II directive. The directive aims to strengthen the current MiFID requirements for third party payments and benefits. It distinguishes between the rules that apply to investment services of portfolio management and investment advice on an independent basis, and for all other investment services. RDR (2012): Retail Distribution Review in UK started the trend by banning commissions in DOL s Fiduciary Rule (2017): In the US, the DOL s Fiduciary Duty Rule has a significant pressure on fees combined with a focus on investment performance. The rule has already led to significant market dislocation with unclear benefits. The proposed rule has led most wealth managers to rationalise 2530% of retail mutual funds, and asset managers have responded by merging mutual fund offerings with similar mandates, launching new share classes, such as T-shares and clean shares. Legend: USA United Kingdom European Union No specific regulation: In Asia-Pacific ex Japan and Australia, no specific regulations are proposed, but there is significant pressure from investors for greater transparency into fees and costs. Twin Peaks (2017): Twin Peaks model in South Africa aims to strengthen South Africa s approach to consumer protection and to create a more resilient and stable financial system. South Africa Asia Pacific Future of Financial Advice (2013): In Australia, the legislation introduced a prospective ban on conflicted remuneration structures including commissions and volume based payments, in relation to the distribution of and advice about a range of retail investment products. Australia Source: Market Research Centre analysis 18

19 Fee models are transformed Major territories will have increased regulation that improves disclosure and aligns interests with the investor Decrease in fee levels The UK s RDR started the trend by banning commissions. Since its implementation (2012), there has been a decline in fund fees. Regulators have since introduced similar measures in Australia, South Africa, the Netherlands, and many other countries. Most recently, the European Union has banned retrocessions through its MiFID II directive. RDR also led retail investors to switch to clean share classes. MiFID II is expected to create a similar impact. This transformation of fee models will continue to put pressure on revenues for both asset and wealth managers. 1.15% 1.10% 1.05% 1.00% 0.95% 0.90% 0.85% 0.80% Overall fees in the UK 1.13% 1.07% 0.97% 0.99% 0.90% 0.91% New fee models Case study: UK % of clean share class (2016) EU ex-uk 11% Alliance Bernstein is launching a new fee structure for selected active strategies, which is intended to challenge the rise of passive funds. 45% 55% The model includes a passive base management fee together with a performance-related fee. 89% Clean share classes Non-clean share classes Sources: Market Research Centre, FCA, and Morningstar 19

20 Institutions dissect alpha and beta A shift is taking place in the AWM industry. The availability of passives allows investors to get exposures to the market inexpensively. Yet there are alternative strategies where unique skill, knowledge, and infrastructure does create alpha. Cost Control Institutional investors have a razor-sharp focus on what they pay for alpha and beta. The emergence of Smart and Alternative Beta allows investors to gain exposure to investment factors previously accessible only through high costs, less transparent, or illiquid vehicles. This separation will lead to the ability to better select alpha generating products and reward only the Asset Mangers capable of consistently delivering it. On the other the hand the closet index trackers will have nowhere to hide. Alternative Beta Better Alpha By gaining exposure to pure beta, investors can have a better view on their expected portfolio returns, and have better control over the composition of their portfolios. Advantages Better Beta Flexibility Risk management The proliferation of indexes and evolution of smart beta investing has given institutional investors the tools to customise portfolios to their needs. By decoupling alpha and beta, investors can gain better view on which risk factors influence the performance of their portfolios. 20

21 Millennials shun traditional wealth management Millennials enter the picture The next wealthiest generation The largest intergenerational wealth transfer is going to take place Millennials wealth, USD tn 2015 Globally, in the next two decades 460 billionaires will pass down USD 2.1tn. In North America, it is expected that Baby Boomers will hold over USD 30tn by Millennials wealth accounted for USD 16.9tn globally in Asia 3.6 Western Europe 3.2 North America 1.9 Japan 1.2 Middle East and Africa Latin America Eastern Europe Millennials are a different type of investor A conservative approach to the investments. Cash (24%) is the largest asset held by millennials globally, followed by equities with 19%. Global millennial average asset allocation, % 19% 18% 17% 9% 9% 4% Cash Equities Real Estate Fixed Income Non-traditional Gold/metals Other 91% of millennials globally use ETFs for equity investments. Younger investors use cheaper passive products with an online investing solution. For example UK s millennials are comfortable (85%) with robo-advice. 91% invest in ETFs for equity 61% have a conservative approach Sources: Market Research Centre, Legg Mason, Financial Times, and UBS 21

22 Tax a trust issue Common Reporting Standard (CRS) In an era of skepticism of financial services, especially among the millennial generation, tax will become important for the brand. Being viewed as not paying a fair share of tax or using questionable tax havens will be unacceptable. In the years ahead, tax will become an important operational business risk, just as valuation and regulatory reporting are naturally viewed as operational risks. Over 50 countries have signed up to CRS, agreeing to share information on residents assets and incomes automatically. CRS is being introduced from 2016 to 2018 by G20 leaders and OECD members. Source: Market Research Centre analysis, and OECD Legend: Countries operating CRS in 2016 Countries operating CRS by

23 Four transforming trends Digital technologies: do or die 23

24 Digital technologies: do or die Technology changes everything End of the investment analyst? Driving the middleand back-offices to zero Digitising distribution and client engagement Alternative intelligencepowered robotic processes can now complement or substitute analysts in research teams by monitoring and analysing every public company. This represents an opportunity for AWMs to automate the research process since the majority of them will have to absorb costs for external investment research due to new regulations (e.g. MiFID II). Some alternatives managers are successfully leveraging quantitative strategies and regard themselves, first and foremost, as technology companies. Technology-enabled investing will also simplify risk management. Firms will seek to automate everything in the middleand back-offices. The large regional and global wealth managers and the asset managers will automate their in-house operations. Automating the middle- and back-offices will also improve data analytics, providing a lot more information about what s going on in the business. Digital technologies are already disrupting the client engagement model. The more firms know about their clients the better. The risk profile. Family life. Professional life. There are events that can be tagged through social media. 24

25 End of the investment analyst? Diversity and talent acquisition are going to play a larger role New requirements in human capital will be needed Innovation, human capital, and digitalisation are among the highest priorities of CEOs. New talents will be hired based on much broader range of skills, as well as more innovative and agile mind sets. Data scientists, for example, will be sought after as much as research analysts. Increasing importance of diversity Diversity will become increasingly important to business success. This will include gender, generation, ethnicity, sexuality, disability, as well as diversity in terms of work skills. Diversity can both broaden the pool from which talent is chosen and bring people with fresh ideas and experience needed to foster innovation. How difficult do CEOs find it for their organisation to recruit people with the following skills or characteristics? Creativity and innovation Leadership Emotional intelligence Problem solving Adaptability Risk management Digital skills Collaboration STEM skills -60% -40% -20% 0% 20% 40% 60% 80% 100% Not very difficult Not difficult at all Somewhat difficult Very difficult Sources: Market Research Centre, Diversity Journey, CEO Survey 2017, and No holding back 25

26 Driving the middle- and back-offices to zero AI appears to be one of the key enablers of automation in AWM A recent market study identifies some of the leading use cases for Artificial Intelligence by revenue* accrued from Certain AWM use cases such as algorithmic trading are seen as more promising in terms of dollars spent on technology. Customers and Clients marketing Automated clients segmentation and targeting 24/7 customer services powered by AI Tailored advertising based on predictive analysis Call center optimisation and use of chatbots Clients onboarding and support services Big data analytics Contract ingestion and analytics Automated investment strategies Financial information extraction Portfolio management and product development Robo-advising Algorithmic trading Sentiment analysis Models synthetisation to generate new solutions Use of deep analytics for customised products recommendation Risk, regulation and compliance Anti-money laundering services Regulatory mapping Investigation optimisation Use of AI to perform calculations and execute trades in order to hedge portfolios Market revenue of top AWM use cases/segments of artificial intelligence (AI) worldwide, from 2016 to 2025 USD mn 3,000 2,500 2,000 1,500 1, , , Algorithmic Content trading distribution on strategy social media performance improvement Contract analysis Source: Top 10 artificial intelligence use cases by market revenues worldwide , 2016, Tractica *The estimates represent software revenue which incorporates AI -led and AI-enabled sales on the technology case 26

27 Digitising distribution and client engagement Betterment launch Personal Capital Betterment launch launches hybrid B2C offering at advisor model offering a B2B offering TechCrunch called Betterment Wealthfront Institutional launches in Pershing Advisor Solutions partner with Motif Investing 2015 Charles Schwab launch a proprietary platform, Intelligent Portfolio Solutions Northwestern Mutual acquire LearnVest Blackrock acquire FutureAdvisor aiming to white label services to banks and brokerages Vanguard launched proprietary platform, Personal Advisor Services Fidelity launched it s proprietary platform, Fidelity Go FutureAdvisor announce its first partnership with BBVA Compass Invesco acquire Jemstep 2016 BlackRock acquire stake in robo-adviser Scalable 2017 Future Wave 1 Disruptor Wave 2 Quick Follow Wave 3 Enabler Non-exhaustive examples of Robo-advisors product offerings Sources: Market Research Centre 27

28 Four transforming trends Funding the future 28

29 Funding the future AWM fill financing gaps that have emerged since the GFC 1 From bridges to power grids and retirement homes Infrastructure assets will expand more than tenfold, from USD 0.3 tn in 2015, to USD 3.4 tn in According to Oxford Economics, as people in Latin America, Asia, and Africa migrate to cities, there s urgent need for water, power, and transportation facilities. Large infrastructure investments are being planned, for example a USD 1 tn investment in the US domestically and the USD 900 bn One Belt, One Road strategy in China. Infrastructure investors are likely to tackle a broader range of opportunities and risks. 3 2 Taking responsibility for retirement Replacing retrenching banks As banks lending activities continue to be restrained by capital- and liquidityrelated regulations, asset managers are filling the gaps. In the EU, there s a drive to increase the role of capital markets and therefore asset managers in funding business. Asset managers have been expanding into private debt where they re funding real estate, private equity, SMEs, and start-ups According to Preqin, the private debt industry managed assets of USD 595 bn in June 2016, four times the 2006 value. AWM will play a growing part in investing for retirement as the world population builds wealth and as governments shift from pay as you go to funded pension schemes. Expansion in defined contribution assets is one of the main forces driving our optimistic forecasts. Retiring Baby Boomers and incoming Millennials will dramatically reshape retirement and saving behaviours. 29

30 From bridges to power grids and retirement homes (1/2) Infrastructure now an asset class in its own right We anticipate soaring growth in real assets mainly infrastructure and to a lesser extent real estate. Infrastructure need is 45% and 37% higher than infrastructure spending in the Americas and Africa respectively Utilities Fossil fuels investment will fall by 60% while investments in renewable energy will increase. In 2016, 42% of infrastructure deals were renewable energy deals. Extraction Between now and 2025, the extraction sector is expected to grow at annual rate of 5%. Evolution of Infrastructure Fund assets (USD bn) 3,600 3,428 3,200 2,800 2,400 Transport In the next 20 years, more cars may be built than in the auto industry s entire history. 2,000 1,705 1,600 Manufacturing The manufacturing sector will grow at an annual rate of 8% by 2025, representing 21.3% of global infrastructure spending. Social Infrastructure Aging populations in the West and Asia will need healthcare facilities, while developing countries will require schools for the youth. 1, e 2025e Sources: Market Research Centre, World Energy Outlook, International Energy Agency, Preqin, World Bank, and IMF 30

31 From bridges to power grids and retirement homes (2/2) Emerging Asia-Pacific to account for 60% of global infrastructure spending by Estimated Infrastructure spending capital flows by region (5-year cumulative) in USD tn North America Europe e e Substantial requirement for investment in new highways and bridges in the US due to rising traffic levels and rectification of deficiencies in the current network e e Europe focuses more on rail transport and less on roads in comparison to the global average. Infrastructure need is 15.6% higher than future infrastructure spending. Latin America 10.0 Africa & Middle East* e e Expected deceleration of inflation combined with sound growth of GDP offers good environment for investment in infrastructure Asia Pacific e e Rising population and wealth combined with accelerating urbanisation. Road, electricity, and rail account for a large proportion of China s future infrastructure spending e e Mixed inflation trends combined with moderate economic growth. Focus of infrastructure spending will be on electricity, water and sanitation services. Source: Market Research Centre and Oxford Economics Global Infrastructure Outlook Note: Estimated infrastructure capital flows is 5-Y cumulated yearly infrastructure spending. Please note that our methodology does not take into account the appreciation of Real Estate market prices. *Estimated infrastructure spending for Africa only 31

32 Replacing retrenching banks Asset managers are funding RE, PE, SMEs, and start-ups through private debt Evolution of Private Debt assets and its CAGR (USD bn) USD 595bn Assets under management in the private debt industry are growing with an annual compounded growth rate of 11.3% since 2010, up to USD 595 bn as of June Stronger regulations Higher returns required Diversity of investment opportunities Jun-16 Banks face stronger regulations regarding lending Since the 2008 GFC, greater capital requirements and stronger risk management are required. But the borrowing demand from companies remains and even grows. Private debt is growing quickly in Asia and in the rest of the world, catching 12% of global investors in January 2016 to 17% in January Investors are looking for higher returns Environment of record-low interest rates puts pressure on investors returns. Private debt is a way to diversify portfolios and provides attractive risk-adjusted returns. 85% of investors in private debt are institutions, mainly private and public pension funds. A diverse range of investment opportunities Public debt provides asset managers access to investment opportunities outside of traditional fixed income investments. Sources: Oliver Wyman and Morgan Stanley, Financial Times, InstitutionalInvestor.com, Preqin, and Muzinich 32

33 Taking responsibility for retirement (1/2) Ageing populations will transform retirement Individuals, especially Millennials, are starting to save more. For example, according to the TCRR (2), Millennials median start age for saving is 22 versus 35 for Baby Boomers. Governments are responding by increasing retirement age and promoting auto-enrollment that according to IFS, boosted the number of UK savers by 81% between 2012 and 2015 (1). Ageing populations and retiring Baby Boomers are putting strain on pension systems worldwide.. Old-age dependancy ratio (3) across major economies Japan United States e e Germany e 2050e e e 2020e 2050e UK France China e e 2050e 2050e Source: United Nations estimates (2014), World Population Prospects: The 2012 Revision, and Institute for Fiscal Studies, (1) Institute for Fiscal Studies. Private sector workplace pension savers. (2) Transamerican Centre for Retirement Research. (3)Dependency ratio is defined as the number of 65+ year olds for every year olds 33

34 Taking responsibility for retirement (2/2) Pension assets: Defined Contribution plans growing faster than Defined Benefit plans Defined benefit plans are being offered less by private employees and are growing slowly (2.6% CAGR in the last decade) mainly due to Baby Boomers retiring and disbursing. Defined contribution plans are growing faster (5.6% CAGR in the last decade) as more and more private and public employers opt for these. According to the TCRR*, in the US Millennials increasingly opt for Individual Retirement Accounts as they offer more customised solutions than standard DC plans. Pension fund assets of major economies and DB/DC breakdown (USD bn, 2016) 25,000 22,480 20,000 18% 15,000 10,000 5% 6% 4% 40% 60% 5, % 72% 2,868 United States United Kingdom 87% 94% 95% 96% 1,583 1,575 1,296 1,282 Australia Canada Netherlands Japan Defined Contribution plans Defined Benefit plans Sources: OECD (2017), Willis Towers Watson, Global Pension Assets Study 2017, and *Transamerican Center for Retirement Research The pie charts show the DB-DC breakdown of total DB+DC plans. They do not take IRAs into account 34

35 Four transforming trends Outcomes matter 35

36 Outcomes matter Multi-asset, outcome-based solutions dominate 1 Active and passive complement each other Passive ETFs will prove popular, although ETFs will also increasingly have active strategies. The liquidity-driven market environment that has favoured passive investment will inevitably end, and a major market correction will inevitably happen at some point. Such an event would remind investors that passive funds offer no downside protection. By contrast, smart beta ETFs and active strategies would be more resilient. 3 2 Alternative strategies contrasting fortunes Multi-Asset and outcomebased investing Active, passive, and alternative strategies are becoming building blocks for multi-asset, outcome- based solutions. Passive strategies will benefit from the move to multi-asset solutions. There will be rising demand for objectivebased products that link more directly to investors goals, rather than simply providing asset class or style exposure. 4 Real assets will be rewarded for delivering alpha through operational expertise; for example, by using management skills to improve the profitability of a port or a portfolio of retirement homes. Hedge funds, generally, will face differing fortunes following years of inconsistent average performance. Those hedge funds that deliver alpha will see their assets grow. Survival of the fittest will see poor performers or undifferentiated niche strategies shrinking. ESG investing grows The space for environmental, social, and corporate governance (ESG) investing will grow. As can be illustrated by Sweden s pension funds. AP fund is moving ahead with sustainable investing, deciding to make green bonds a part of its overall investment strategy. In Asia, institutional investors increasingly look for asset managers with ESG capabilities. Conceptually, it is already accepted that ESG investing does not necessarily harm returns. 36

37 Active and passive complement each other (1/2) Active and passive and strategies have become building blocks for multi-asset solutions USD 36.6tn By 2025, passives are forecasted to reach USD 36.6tn, which will be considerably higher compared to 2016 (USD 14.2tn) and the 2020 forecast (USD 23.2tn). Passive strategies will benefit most from the move to multi-asset solutions. USD 21.1tn Alternatives will continue to grow. Over the four years from 2016 to 2020, they are expected to grow from USD 10.1tn to USD 13.9tn. We forecast alternatives to expand to USD 21.1tn in Alternative investments that deliver alpha will be important components of multi-asset solutions that boost performance. Global AuM 2016, in USD tn Global AuM 2020e, in USD tn % 71% Global AuM 2025e, in USD tn 21.0% 17% % Alternative % 13.9 Passive 25% % % 21.1 Active Source: Market Research Centre analysis 37

38 Active and passive complement each other (2/2) ETFs are unevenly distributed across regions, while their total value continues its rise USD 3.3tn As of July 2016, ETFs and ETPs combined totaled USD 3,3 tn. From 2012 to 2015, the annual growth rates of ETFs and ETPs was 16.6% CAGR. USD 0.6tn As of August 2017, smart beta ETFs totaled USD bn worldwide. The United States is home to USD bn smart beta ETFs, followed by Europe (USD 46.5 bn), Canada (USD 15.0 bn) and the Asia Pacific excluding Japan (USD 5.7 bn) Currently, there are more than 100 active ETFs within the US. In September 2017, the SEC gave the green light, allowing Vanguard to list active ETFs. This has the potential to increase adoption of active ETFs, since this product provides benefits of both actives and passives. Growth in ETFs/ETPs assets globally (USD tn) United States Smart Beta* 2015 Jul Total: ETF Assets ETP Assets Sources: Market Research Centre, ETFGI, and ETF.com Smart beta ETF (August 2017, USD bn) Europe Canada Asia-Pacific (excluding Japan) Note: Numbers might not sum due to rounding 38

39 Multi-Asset and outcome-based investing Focusing on outcomes and not on beating the market has historically provided more stable returns Multi-asset investing Active, passive, and alternative strategies are becoming building blocks for multi-asset, outcomebased solutions. Cyclically adjusting the asset allocation model ensures that the client is in the right asset at the right time. Alternative investments that deliver alpha will be important components of multi-asset solutions that boost performance. Investment advisors will need to evaluate how their portfolios align with client goals and which fund attributes matter most. Passive strategies will benefit most from the move to multi-asset solutions. There will be rising demand for objectivebased products that link more directly to investor goals Outcome-based investing Demand for passive and alternative strategies will grow, but the place for active management will remain. Source: Market Research Centre 39

40 Alternative strategies contrasting fortunes USD 21.1 tn Active, passive, and alternative strategies have become building blocks for multi-asset, outcome-driven solutions (which will increasingly include environmental, social, and governance outcomes). Alternatives will continue their rise from USD 10.1 tn in 2016 and are forecasted to reach USD 13.9 tn in 2020 and USD 21.1 tn in In absolute terms, private equity will rise from USD 4.7tn in 2016 to USD 10.2tn in Hedge funds are expected to experience the lowest growth rates among alternatives, with 4.5% from 2016 to 2020 and 3.8 % from 2020 to Alternatives AuM by type in USD trillion 8.7% % 11.8% % % % % 7.8% 17.1% 28.5% Hedge funds Infrastructure Real estate 6.9% Commodities % % % 3.8% 2020e e Private equity Source: Market Research Centre analysis Past data based on: EFAMA, The City UK, Insurance Europe, Financial Stability Board (FSB), Credit Suisse, Towers Watson, OECD, and World Bank 40

41 ESG investing grows Sustainable investing (ESG and SRI) is becoming increasingly more required Rising interest for sustainable investing Institutional investors hold the largest share of SRI investments in 2016 with 74%. Global sustainable investment assets presented a strong average growth of 14.6%. Asia-Pacific was the fastest growing region. Growing interest can be illustrated with investments in Chinese Green Bonds, which experienced an impressive growth, reaching USD 36.4 bn in Global sustainable investing trends, USD tn % % 2014 North America 2016 Asia Pacific Green Bond Issuance: China vs. Rest of the World, USD bn China Retail 15.9% 0 SRI Assets investors breakdown*, 2016 Institutional Europe 74% % Rest of World * Global data ex-asia Pacific Sources: Market Research Centre, Global Sustainable Investment Alliance, and Morgan Stanley 41

42 Appendix 42

43 Mutual funds AuM by region in USD trillion Solid growth towards 2025 We foresee retail funds (including ETFs) AuM growing from USD 36.3tn in 2016 to 46.5 by 2020 and 59.5tn by 2025: USD 59.5tn With the appreciating Euro, the growing stock markets with low interest rates, we expect a strong AuM growth in European countries in and a progressive slow-down afterwards, moderated by the strong growth in passives. Emerging countries growth should be consistently strong over the two periods, even for actives (but to a lesser extent than passives); with the industry developing and further penetrating individual wealth % % % 7.8% % 5.3% 16.3% Asia Pacific Europe 29.1 Latin America % 7.3% 9.9% % % 7.1 Middle East and Africa 9.0% 3.2% 2020e 11.0 % e North America Source: Market Research Centre analysis Past data based on Lipper and ICI 43

44 Pension funds by region in USD trillion Pension assets will recover firmly in 2017 and 2018, they should reach USD 53.1 tn in 2020 and 64.6 tn in 2025: USD 64.6tn With the gradual shift to DC and IRAs, assets will be boosted by the increasing participation and saving rates of Millennials, whereas DB plans are likely to continue experiencing net outflows in most developed countries. This adds to the macroeconomic factors (economic outlook, forex and interest rates), suggesting firmer and then slightly slower growth % % % % % 2.9% Asia Pacific Europe Latin America % 7.5% 13.9 % 10.3 % % 10.1 % % 8.6% % Middle East and Africa 2020e e North America Source: Market Research Centre analysis Past data based on Financial Stability Board, World Bank, OECD, and Towers Watson 44

45 Insurance companies assets in USD trillion Assets will capitalise on the momentum observed in 2016 and reach USD 38.4 tn in 2020 and 44.7 tn in 2025: USD 44.7tn With fading away recessionary pressures and forex normalisation, emerging countries and European insurance assets should grow faster than usual until 2019; before slowing down gradually between 2020 and % % % % % 9.2% 3.5% -1.9% % % 3.0% 7.7% Asia Pacific % 44.7 Europe Latin America % 2016 Middle East and Africa % 2020e e North America Source: Market Research Centre analysis Past data based on Financial Stability Board, World Bank, OECD, and Towers Watson 45

46 HNWI wealth by region in USD trillion USD tn HNWI assets should reach USD 93.4 tn in 2020, USD tn in 2025, North America will account for over half of assets in 2025: Personal wealth is accumulating fast, mainly in developing countries, but also In developed countries. Current EU and US policy based on tax cuts and incentives should help increase wealth among the wealthiest % % % % 9.7% % 9.7% % % 9.1% Asia Pacific Europe Latin America 6.0% 5.5% Middle East and Africa % % 5.4% 2020e e North America Source: Market Research Centre analysis Past data based on Credit Suisse 46

47 Mass Affluent wealth by region in USD trillion USD tn Assets will grow quickly to reach USD 84.4 tn in 2020 and USD tn in 2025, with a slowdown between : The growing middle-class in China, ASEAN countries, and Latin America will allow emerging countries to represent almost half of the global assets by % % % 1.3% 9.9% % 9.6% Asia Pacific Europe Latin America 4.0% % % 8.9% 4.9% % % 7.9% Middle East and Africa 2020e 2025e North America Source: Market Research Centre analysis Past data based on Credit Suisse 47