The transformation of fee and distribution models that asset managers must address to compete are some of the primary game-changers impacting mutual fund and ETFs.
A new report by PwC sheds light on why the asset management industry is at a precipice of unprecedented growth and change. North America fund firms, the report says, are forecasted to have AUM in 2020 of more than $49 trillion, exceeding expected AUM for Europe, Asia Pacific and Middle East and Africa combined. In a Q&A with Money Management Executive, John Siciliano, managing director for PwC's global asset management consulting practice, talks about what's driving wealth management AUM globally and how mutual fund and ETF managers must adapt to stay in the game.
Q: By 2020, you've found that global asset management will claim in excess of $100 trillion in AUM, compared to the roughly $60 trillion in 2012. How do mutual funds/ETFs play a role in that growth?
Mutual fund and ETFs play such a big role because of tremendous growth in the defined-contribution and high-net worth markets. Also, we see ETFs reaching $5 trillion globally by the end of decade. ETFs are a big disruptor because of their low cost and flexibility -- so you'll see both products play a role in growth. ETFs are a disruptor because they're cheaper, trade intraday, and investors can control the tax situation unlike with mutual funds. A lot of managers aren't paying a good enough attention to what's going on with ETFs -- so larger, well known firms have captured the positions. Many will have to play catch up which is hard. I think smaller players could've done better.
Q: North America will hold approximately half of global assets, with a forecasted 2020 AUM of over $49 trillion, exceeding expected AUM for Europe, Asia Pacific and Middle East and Africa combined. How does that pace of growth in North America compare with other regions?
Though North America has historically accounted for half of global assets, and that percentage has now dipped to slightly less than half as growth in Asia, Africa and Latin America accelerates, primarily in high net worth and defined contribution.
Q: Where will fund managers find the most opportunity geographically over the next 5-10 years?
The greatest opportunity will be with emerging sovereign wealth funds -- there are big opportunities in Asia ... more slowly in Africa. They're still a frontier market, so there are issues with how once you invest how do you get out of it, and how good are valuations? It needs to be for someone with a strong stomach and a view to invest for a long period.
Q: Your research shows that mass affluent and high-net-worth-individual segments will increase dramatically, with mass affluent assets alone expected to nearly double to $100 trillion by 2020. Are you foreseeing a widening divide between the rich and poor in the U.S.? How do mutual funds/ETFs play a role among lower net worth investors?
I think product sets are the same for people of all asset classes, but the ultra-high net worth have access to new products earlier. You're seeing a democratization of products, with retail alts for example, as mutual funds and ETFs begin to offer alternative products to the retail investor that historically have been the province of the HNW and the institutional investor.
Q: Alternatives will become more mainstream with assets reaching $13 trillion by 2020, and ETFs will proliferate. How will alternatives impact mutual funds/ETFs?
You're going to see alternatives in mutual fund and ETF formats. More products will be available for retail investors. That's part of the way assets reach $13 trillion. Another way is via the expansion of sovereign wealth and through retirement plans trying to get to their long term objectives by investing in alts.
Q: What are the specific game changers that asset managers must address to grow and compete?
There is a huge component of technology from a regulatory point of view -- huge demands must be bet with reporting and disclosure. There's also a digital media push. A lot of firms today don't have a true internet presence. For successful firms they'll need that. From a product offering point of view, firms will need to look at products that are more global in nature that include frontier markets and alternatives. A lot of managers need to revisit products -- what they're offering and to whom.
Q: How will the relationships between money managers and intermediaries change in the years ahead?
Relationships are already changing - based largely on distribution and ease of distribution. Now it's more based on product quality. People are looking for long-term returns and low volatility. The criteria for investing has changed. Prior to the crisis people were more relaxed about long term returns. Intermediaries and managers were in a more relaxed and optimistic environment. Post crisis there's more discipline on products and return.
Q. Your research found that cyber risk will intensify, ranking as a top priority alongside operational, market and performance risk. Are mutual fund/ETF managers ready to handle those risks? How can they be prepared?
I think this gets back to tech. Mutual funds and ETFs are one way of delivering investment products. In the old days the goal was just to deliver investment excellence and good client service. Now across the firm everything is important -- people haven't paid as much attention to cyber risk because they've been so busy with other stuff. It's clear that from a client perspective, it's imperative to focus on operations. Firms are going to put a lot of capital into this. They'll have to redo budgets to commit capital.