Asset Management
The Passive Investment Revolution Isn't Losing Momentum - PwC

Overall assets are set to continue growing and the share taken by those using a passive approach will increase, said the report, chiming with views expressed elsewhere.
Another report predicts that the share of assets managed actively
will shrink because of the perceived benefits of more passive
approaches, such as low cost and inability to consistently beat a
broadly efficient market. Change will lead to an industry
dominated by a small cluster of mega-firms overseeing large
buckets of passively-run assets, it is predicted.
PricewaterhouseCoopers,
the professional services firm, joined the ranks of organisations
such as Boston Consulting Group and Willis Towers Watson in
noting the shift to passive from active investment, although the
total size of the AuM pie is also expected to rise across the
board.
In a new report, Asset & Wealth Management Revolution:
Embracing Exponential Change, PwC said it predicts that
global AuM will almost double in size by 2025, from $84.9
trillion in 2016 to $111.2 trillion by 2020, and then again to
$145.4 trillion by 2025.
The report also warns firms they must act to survive and thrive
in tough competitive conditions.
“Asset managers can take advantage of this massive global growth
opportunity if they’re innovative. But it’s do or die, and there
will be a ‘great divide’ between few have’s and many have not’s.
As a result, things will look very different in five to ten
years’ time and we expect to see fewer firms managing far more
assets significantly more cheaply,” Olwyn Alexander, PwC’s global
asset and wealth management leader, said.
John Blackman, chief executive of JHC, a technology firm working
in financial services, said, perhaps unsurprisingly, that trends
outlined in the report showed why technology solutions are
crucial. “Today’s report from PwC highlights the vital role that
technology will continue to play in the asset and wealth
management sectors. The market is growing and with it the
expectation of clients, and the range of options they require,
also escalates,” he said.
While active management will continue to grow and play an
important role, reaching $87.6 trillion by 2025 (60 per cent of
global AuM), PwC predicts growth in passive management to reach
$36.6 trillion by 2025 (25 per cent of global AuM).
Alternative asset classes - in particular, real assets,
private equity and private debt - will more than double in
size, reaching $21.1 trillion by 2025, accounting for 15 per cent
of global AuM.
In the niche
The industry’s involvement in niche areas such as trade finance,
peer-to-peer lending and infrastructure will dramatically
increase, PwC said.
“The industry must act in three areas. First, asset and wealth
managers must be prepared for success in some areas and failure
in others. This means they should reorganise their business
structure to support their differentiating capabilities and to
cut costs elsewhere. Second, every firm must embrace technology,
as it impacts all functions and will determine if they win or
lose in this fast-changing landscape. And thirdly, different
skills are needed, backed by new employment models,” Alexander
said.
Retail (mutual) funds (including ETFs) will almost double assets
by 2025 and institutional mandates will expand similarly.
Alternative asset classes - in particular, real assets,
private equity and private debt - will more than double in
size, as investors diversify to reduce volatility and achieve
specific outcomes. The industry is set to manage a greater share
of global retirement and pension funds too. If current growth is
sustained, the industry’s penetration rate (managed assets, as a
proportion of total assets) will expand from 39.6 per cent in
2016 to 42.1 per cent by 2025, PwC continued.
PwC anticipates assets growing at 5.7 per cent a year in North
America from 2016 to 2020, slowing to 4.0 per cent per annum from
2020 to 2025, lifting assets from $46.9 trillion to $71.2
trillion over the nine years. Similarly, Europe is projected to
grow at 8.4 per cent and 3.4 per cent per annum respectively over
the two periods, with assets rising from $21.9 trillion to $35.7
trillion.
Developing Asia-Pacific’s dynamism is set to spur growth of 8.7
per cent a year from 2016 to 2020, accelerating to 11.8 per cent
from 2020 to 2025. This will lift regional assets from $12.1
trillion to $29.6 trillion. Latin America is likely to grow at
similarly rapid rates of 7.5 per cent per annum from 2016 to
2020, accelerating to 10.4 per cent a year from 2020 to 2025.
From a low base of $3.3 trillion, the region’s assets are
projected to increase to $7.3 trillion.
Active investments will continue to lose market share to passives
and alternatives, but AuM will increase across all three lines,
PwC said.
“Active, passive and alternative strategies are becoming building
blocks for multi-asset, outcome-based solutions. In this context,
demand for passive and alternative strategies will grow, but the
place for active management will remain,” it said.
PwC forecasts that funds under active management will climb from
$60.6 trillion in 2016 to $87.6 trillion by 2025, but their share
of overall global assets under management will decrease from 71
per cent in 2016 to 60 per cent by 2025.
Passives will gain huge market share, rising from 17 per cent of
AuM in 2016 to 25 per cent in 2025, while alternatives rise from
12 per cent to 15 per cent. Passives’ AuM will more than double,
from $14.2 trillion to $36.6 trillion; alternatives from $10.1
trillion to $21.1 trillion.