Changing face of asset management business

THE global financial landscape has changed profoundly over the years with increasing influence of the financial sector on the broader economy.

However, the global financial crisis more than a decade ago has led to a shift toward greater market-based intermediation, spurred by regulatory changes in the banking sector, thus leading to a more prominent role for the asset management industry.

The global asset management industry forms one of the core constituents and most dynamic sector of today’s financial markets, with a huge potential for growth.

Global assets under management (AUM) rose from US$54 trillion in 2005 to US$77 trillion in 2015, which represents about 40% of global financial system assets, on the back of broader structural trends that affected the financial markets as a whole.

The Asian region in particular is expected to become the centre of this global AUM growth, driven by infrastructure investment needs, ageing demographics and growing wealth in emerging markets as well as efforts for further regionalisation and harmonisation. Malaysia’s asset management industry has also shown resilient growth as demonstrated by the industry’s AUM figures, despite some signs of a tapering in recent years. However, AUM is only one part of the bigger story.

Beyond these headline numbers, the sustainability of the industry more crucially depends on each firm’s ability to navigate heightened cost pressures and compression in margins in an increasingly competitive landscape juxtaposed against key structural shifts, which will have industry-wide effects.

Demographic changes and shifts in investors’ preferences raise the question of the ability for asset managers to, for instance, provide holistic solutions that are tailored to meet the specialised needs of the pensions industry.

Meanwhile, the advent of digitalisation and lower barriers to entry for new fintech business models will find incumbent players faced with greater competition, prompting the need for them to embed digitalisation holistically into their business models. This also comes at the onset of changes in regulations and market structures which demand for higher levels of accountability and transparency to end-investors, and last but not least, the perennial issue of having the right talent to deal with these evolving challenges.

Expectations versus reality

The Institute for Capital Market Research Malaysia (ICMR) recently collaborated with the Nomura Institute of Capital Markets Research (NICMR) to release a joint-research report on the “The Evolving Business of Asset Management: Malaysia’s Perspective.”

As part of our study, a proprietary survey was developed to complement insights from interviews with key stakeholders and to provide a more objective assessment of the levels of priorities among the different categories of asset managers over the short and medium term; across four key pillars: demographic trends and shifts in investors preferences, digitalisation, market regulations and structures, and talent.

Major results of the survey reveal some readiness challenges for our domestic asset managers. For instance, in light of an expected shift in investors’ preferences, which was rated the most critical external shift affecting the business of asset managers in the next 12 to 24 months, there were shared expectations for increasing demand for newer types of products, like Sri-type funds and private mandates as well as non-domestic equities and alternatives.

Nonetheless, this was not matched with their present ability to deliver on these expectations, either due to developmental constraints to be able to diversify their investor base, markets or asset classes, to be able to internationalise or gain scale or to have the requisite talent to meet these expected shifts.

The survey also highlighted that 89% of domestic asset managers highly agree that digitalisation will impact their business models in the next 12 months.

Nonetheless, they also indicated that their digital priorities will continue to focus on enhancing middle-to-back end functions with mixed findings from the interviews; with some more focused on day-to-day operations or adopting a more “wait-and-see” approach due to high legacy and capex investments.

Globally, the headwinds faced by the industry from fee pressures and rising costs, especially driven by the rise of passive investing have led to a series of industry consolidation in recent years, with a PWC report highlighting 140 merger and acquisition (M&A) deals in 2018, up 72% year-on-year. And as the industry becomes increasingly more competitive, there are expectations for further consolidation to shrink overcapacity in a “crowded market”; especially for traditional asset managers.

Key mega trends in the developed markets, such as the rise of passive investing in public markets versus more active investing in the private markets and the shift toward differentiated strategies such as alternatives and thematics are not yet mirrored in the Asian region to the level seen in Europe and the US.

However, these trends give valuable insights into how the various forces at play will impact the local industry and shape policies in the region. Across Asia, regulators are taking big initiatives to aid the development of capital markets and end-investors with emphasis on more harmonised regulations, levelling and expanding the playing field and demanding enhanced transparency and higher fiduciary responsibilities of intermediaries.

Looking within and thinking wide

The research report is intended to provide an independent perspective of the state of preparedness for Malaysia’s asset managers in addressing these structural evolutions that are reshaping the industry and to form the basis for further policy deliberations. Beyond identifying the major challenges faced by asset managers, the report also outlines nine interconnected recommendations which are for the consideration of policymakers, industry players and other key stakeholders to address underlying structural issues as well as specific industry challenges.

The recommendations focus on revitalisation of the industry through facilitating greater diversity in terms of asset classes and geographical markets complemented by developing talent through internationalisation efforts and cross-border partnerships as well as greater reciprocal relationships between asset owners and asset managers.

In line with this, the recommendations also emphasise the need to strengthen the role of asset managers in building retirement savings, adopting long-term digital and specialised strategies, bridging the fintech and traditional player divide, strengthening distribution channels, widening product range and embedding financial literacy.

These recommendations need to be considered in a holistic manner and are hoped to strengthen the industry across the value chain by achieving three overarching strategic objectives in particular: promoting inclusive capital markets, strengthening their intermediation roles, and enhancing their value creation.

However, in the context of today’s complexity and uncertainty, many of the opportunities and challenges – whether policy or market-driven – are highly interconnected, where causal relationships are nearly impossible to ascertain. In these circumstances, recommendations which are adopted discretely or which tinker around the edges of the structural constraints, may not be sufficient and more often than not, leaves a gap between policy design and implementation.

This may warrant a systems-thinking perspective linking the asset management industry to the overall ecosystem; and from various facets for instance, a reconnection to the industry’s raison d’etre – to its purpose for the real economy and society. To be clear, financial intermediation through asset management firms has many benefits. This goes back to their core functions to effectively mobilise capital to invest into productive enterprises, thus supporting capital formation, to provide greater diversification needs for a more efficient intermediation function, and to reduce over-reliance on bank intermediation.

Beyond this, the industry’s links to the underlying economy – as key intermediaries to facilitate capital and information flows, as fiduciary agents to act in the best interest of investors and in doing so, to also be able to nurture human capital development for the financial industry – are especially vital, as asset managers make critical asset allocation decisions for the economy.

As such another important facet is a reassessment of the domestic asset management industry in terms of how and whether it is presently structured to effectively meet this “purpose”, combined with a reflection on the systemic nature of some of these structural constraints and addressing them by looking at the whole ecosystem, rather than the individual parts.

To learn more about the ICMR’S report, please visit https://www.icmr.my/the-evolving-business-of-asset-management/.

The ICMR is an initiative by the Securities Commission aimed at promoting sustainable development of the Malaysian capital market through providing focused, pragmatic and evidence-based research and solutions that can be tapped by the industry, policymakers and regulators.