Tough road ahead for asset managers in Asia despite inflow boom

27 May 2019 6 min. read
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Economic growth in emerging Asia has seen increasing asset management inflows to the region, but a new report from McKinsey outlines that it’s not just global businesses which have found it tough to compete against local market players – with foreign asset managers in for a potentially rude awakening as well.

Developing markets are increasingly throwing up competitors to global businesses. These competitors are often embedded, nimble and knowledgeable, and thereby able to use their domestic capabilities, new technologies and understanding of local tastes to grow at a rapid pace. The effect on incumbents can be considerable. New analysis from global consulting leader McKinsey & Company considers the developing world’s increasingly strong competitive forces, and how it relates to the asset management landscape.

“Global companies have long sought new growth in emerging markets. What they’re likely to find lately, however, is a strata of local players that are competing fiercely for the same markets and that now are better managed and much sharper on strategy,” the McKinsey report opens. “As developing-economy companies create greater value, personal wealth is increasing at an impressive rate as a result, particularly in emerging Asia. Incumbents in industries such as asset management will need to follow the money, or face a sharp decline in profitability.”Companies remaining in the top quintile for profit over 10 years by country

Parts of the developing world have seen strong growth in recent years. For the study, McKinsey selected 71 emerging economies and identified 18 that have managed to outperform with average annual growth since the 1970s of 3.5% or by topping 5% over the past two decades. The list features long-tern performers including the likes of China and Malaysia as well as lesser recognised recent growth success stories such as Cambodia and Myanmar.

One finding is that in the top performing economies, global entrants have had a tough fight on their hands. The study found that just less than half of large companies (45%) operating in outperforming emerging-market countries stayed in the top quintile for economic profit over ten years, compared to 62% across high-income countries.

Here, Malaysia has been a particularly difficult territory for sustained success, with just one fifth retaining their position, followed by China at around a third. In the US meanwhile, over two thirds (68%) of top-performing companies managed to retain their market dominance, while the big markets of mainland Europe – Germany and France – see figures of around ~63 percent.

According to the report, the tough conditions also reflect the wide variety of companies active in the regions outperforming the emerging market average – with 160 companies per $1 trillion in GDP, compared to 80 for other emerging markets and 95 for developed markets. The benefit of staying at the top are huge however, with the top 10% of outperforming emerging market companies capturing 454% of the net economic profits generated by all companies.Net-flows of assets under management shifting towards Asia

While the Asia region presents a highly competitive marketplace, it also continues to see increasingly large pools of personal income as businesses succeed. PwC’s most recent global wealth report for example, noted that Asia was home to three new billionaires per week in 2017, with China now boasting 475 alone – rising from just 16 individuals a little over a decade ago. Understandably, global asset managers are increasingly turning to providing management for Asian assets.

According to the data, emerging Asia is already seeing strong net flows of capital management, accounting for 37% of total inflows – or $3.8 trillion – between 2013 and 2017. Western Europe as a comparison accounted for around $3.4 trillion over that period, while North America saw inflows of $1.9 trillion. Yet, while inflows for Asia are high, the region is still well behind in term of total AuM, at $9.5 trillion in 2017, compared to $25.4 trillion in Western Europe and $43.8 trillion in the US.

This suggests a potential cash tsunami still to come. In this respect, McKinsey cites poll about the outlook for growth at a recent CEO Asset Management Summit in London – with the majority agreeing that emerging Asia (including China but excluding Japan and Australia) would account for more than 25 percent of global assets under management in just a decade from now, against a little over 10 percent today.Fee pressure and rising cost impact on asset management profits projection

Already industry competition is fierce, both in terms of customer churn as well as being able to retain position; half of the top ten asset managers from a decade ago have fallen out of the top tier notes McKinsey. And those pressures are set to become even more profound in the coming decade, with the global asset-management industry projected to see annual profit decline by 8.7% between 2017 and 2030.

This scenario, thanks to fee pressure and rising costs slowing revenue growth to 1.7% annually to 2030, would reduce total market profits from $120 billion to $37 billion – even as the assets under management increase from $86 trillion worth to $140 trillion. And it potentially gets worse. “The risks for an average regionally focused US or European asset manager with limited exposure to Asia are even more stark,” McKinsey states.

“By 2030, we project that such a firm would see a 21 percent drop in its share of global assets, and revenue margins would be down ten basis points. If the firm isn’t able to bring its costs down significantly, that would translate into a fall in operating profits of up to 83 percent,” the report concludes. Meanwhile, emerging technologies such as robo-advice continue to disrupt the landscape, while asset managers may soon have to contend with the looming Tech-Fin threat.