How to Disrupt the Investing Industry


Published on

David Teten
New York, NY

Published in: Economy & Finance, Business

How to Disrupt the Investing Industry

  1. 1. Katina Stefanova David Teten Brent Beardsley April 2016 Who Will Disrupt Asset Management, and How
  2. 2. 2 David Teten - Managing Partner, HOF Capital, international venture capital fund - Serial fintech entrepreneur - / @dteten Katina Stefanova - Founder, CIO, and CEO of Marto Capital, a systematic multi strategy asset manager - Senior Executive and Management Committee Advisor at Bridgewater Associates, 2005 - 2014 Brent Beardsley - Senior Partner, Boston Consulting Group - Global Head of BCG’s Wealth and Asset Management Segment Co-Authors
  3. 3. 3 Disclaimer A representative of a firm (“Firm”) is providing this presentation for informational purposes to the intended audience. Nothing in this presentation shall constitute an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction nor should anything in this presentation form the basis of, or be relied upon for, making any investment decision. Nothing in this presentation constitutes professional and/or financial advice of any kind (including business, employment, investment advisory, accounting, tax, and/or legal advice), nor does any information in this presentation constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. This presentation and the information contained herein are provided “AS IS”. The Firm and the presenter make no representation or warranty (express or implied) with respect to the information contained herein (including, without limitation, information obtained from third parties) and expressly disclaims any liability based on or relating to the information contained in, or errors or omissions from, these materials; or based on or relating to the recipient’s use (or the use by any of its affiliates or representatives or any other person) of these materials; or based on any other written or oral communications transmitted to the recipient or any of its affiliates or representatives. The Firm and the presenter undertake no duty or obligation to update or revise the information contained in this presentation. The opinions expressed in this research project, paper, and at are those of the authors alone, and do not represent the views of their employers, any other employee thereof, or of any other institution with which they are affiliated.
  4. 4. Today's Leader Potential Future Leader Discount / Online Brokerage Full-service Brokerage Fixed Income Manager Public Equities Manager Private Equities Manager Fund of Funds Angel Investing Examples of disruption in the investing industry Robin Hood Direct Investment Individual angel groups
  5. 5. 5 The asset management business is a great business, but not as good as it used to be (1) Source: FactSet, Based upon financial services companies in the S&P 500 index, results are for the median company (2) Source: ABA Dodd-Frank Tracker, as of 3/20/15 39.8 32.3 31.8 31.3 26.7 26.0 21.8 11.3 19.1 9.1 6.9 8.9 9.9 8.4 9.8 9.8 0 5 10 15 20 25 0 5 10 15 20 25 30 35 40 45 AssetManagement RegionalBanks Consumer&Specialized Finance DiversifiedBanks CustodyBanks InvestmentBanks& Brokerage REITs Insurance Pre-Tax Margin Return on Equity Pre-TaxMargin(%) ReturnonEquity(%) Continued Fee Degradation Heightened Regulatory Environment Intense Competition from Incumbents and new entrants 9 28 91 72 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Mutual Fund & ETF, % Passive vs. Active Passive Active 15 31 37 66 848 8,231 US Constitution Federal ReserveAct Glass- Steagall Sarbanes- Oxley Dodd-Frank DFA Related Regs Number of Pages in Bill/Regulation (2)
  6. 6. 6 Asset management has largely recovered since 2008
  7. 7. 7 The three fundamental drivers of market movement Economical Behavioral Political
  8. 8. 9 2014 annual asset management industry profits - $102B globally at operating margins of 39%
  9. 9. 10 Investments in financial technology grew by $15.2B between 2013 and 2015
  10. 10. 12 A near zerosum game • Gains are made at the expense of others who underperform
  11. 11. 13 Firms rarely delivers the alpha that they promise • Underperformance with steep management and performance fees
  12. 12. 14 Size Often Hurts Returns • There is inevitable tension between size and returns
  13. 13. 15 Money managers can earn more money at less personal risk than in most other industries • More fees than net gain Source: Simon Lack presentation “The Fallacy of Hedge Funds: The Hedge Fund Mirage, The Illusion of Big Money and Why It’s Too Good To Be True.” May 2014.
  14. 14. 16 The financial services industry, including asset management, has disproportionate power to create systemic economic risk • A negative externality unique to financial services
  15. 15. 17 The “broken agency” problem can cost money holders far more than the same problem does in most other industries • hurts innovation and leads to suboptimal returns
  16. 16. 18 More homogeneous than the clients it serves • underrepresents minorities even though the industry worships diversification
  17. 17. 19 -5 0 5 10 15 20 Annual Return (%) 1970s 1980s 1990s 2010s 1970-201342000s Hedge Funds1 US Equities2 US Bonds3 Note: All returns are total returns (proceeds reinvested untaxed), and also gross returns 1. 1970-1989 Leveraged Capital Holdings from Banque Privee Edmond de Rothschild; 1990-2013 HFRI Fund Weighted Composite Index 2. 1970-1989 total return for US equities estimates from GFD; 1990-2013 S&P 500 Total Return Index via Bloomberg 3. 1970-1979 total return estimates for US Corporate Bond form GFD; 1980-2013 Barclays US Aggregate Total Return Index from Barclays via Bloomberg 4. As of January 2013 Source: Source: R&M, Banque Privee Edmund de Rothschild, Bloomberg, Global Financial Data (GFD), The Hedge Fund Journal Hedge funds used to outperform and to hedge. Now on average it’s not clear if they do either
  18. 18. 20 Global trends positive for money holders, while neutral to negative for intermediaries and money managers Demographic trends Macro- economics trends Industry trends Technology trends Other Key trends Money holders Intermediaries Money managers Aging population Increased role of women Rising middle class Next billion consumers Slowing economic growth Flow of capital to and from emerging markets Diverence of wealth (global divide) Regulatory changes Expansion of passively managed portfolios Rise of consolidation / M&A Rise in E-trade Rise in alternative investments Increasingly savvy and more educated investors Socially responsible investing Big data Rise in information access and networks Rise in internet access Rise in mobile and wireless communication Increase in consumer customization Positive Neutral Opportunity for disruption Source: BCG Center for Sensing and Mining the Future
  19. 19. 22 Tech and Innovation drives transparency while creating new opportunities for funds looking to generate alpha – Will both raise assets and reduce fees
  20. 20. 23 Slow Economy – Forces accountability on money managers
  21. 21. 24 Growth in Women’s Assets and Rise in Millennials – Underserved customers – Women's assets projected to reach $22 trillion by 2020. – Millennials more risk-averse and socially conscious than past generations
  22. 22. 25 Geopolitical – First time net private capital outflows in emerging markets since 1984. $300B in financial outflows in 6 months from China.
  23. 23. 26 Investment Management Firm of the Future Today's Investment Firm Investment Firm of the Future • Post-crisis regulatory environment focused on the past crisis issues • CIO communicating to clients/regulators • Regulatory oversight with external boards • Due diligence as a systematic, on-going oversight and governance process Transparency • Asset class silo risk systems with static firm- wide risk systems (e.g., counterparty risk) • Operational risk silo • Risk based on leading indicators not lagging • Integrated, dynamic risk management across public and private/ illiquid asset classes Risk Management • Individual security selection  active fund section  asset allocation with passive • Investment theses expressed across asset classes including public and private / illiquid • Influencing outcomes / activist investing Alpha Creation • Focus on cohesive culture • Little real talent management • Professionalize human capital management – workforce planning, leadership development • Firm leadership as a professional CEO – not part time CIO/Sales Culture / Talent • Correlation models / predictive analytics based on observable historical data • Data / data mgmt as competitive advantage • Big Data , Artificial Intelligence, Social Media powering investment decisions Technology
  24. 24. 27 Asset Management is currently impacted by both internal and external disruptive trends making it particularly prone for disruption
  25. 25. 28 Passives, solutions, alternatives, and specialties will continue to win a disproportionate share of net flows 2008 $46T 10% / $4T 50% / $23T 9% / $4T 2003 2014 22% / $10T 6% / $2T $36T 59% / $21T 21% / $8T 6% / $2T 8% / $3TPassive/ETFs Active core4 Solutions/LDI/ Balanced3 Alternatives1 $74T 14% / $11T 12% / $8T 39% / $29T 13% / $9T 24% : $18T 11% / $8T9% / $4T 2013 $69T 14% / $10T 40% / $27T 24% / $17T 10% / $7T Estimated share of cumulative net flows CAGR 2% 5% 16% 9% 14% Global AuM split, by product (% / trillions) 4% 11% 11% 17% 15% 5% 7% 11% 10% 16% 1Includes hedge funds, private equity, real estate, infrastructure, and commodity funds. 2Includes equity specialties (foreign, global, emerging markets, small and mid caps, sectors) and fixed- income specialties (credit, emerging markets, global, high yield, and convertible). 3Includes absolute-return, target dated, global asset-allocation, flexible, income, and volatility funds; liability- driven investments; and multiasset and traditional balanced products. 4Includes active domestic large-cap equity, active government fixed income, money market, and structured products. Sources: BCG GAM Market Sizing 2015; BCG GAM Benchmarking 2015; ICI; Preqin; HFR; Strategic Insight; BlackRock ETP report; IMA; OECD; Towers Watson; P&I; Lipper; BCG analysis. -8 35 37 22 14 2015-2018 100%
  26. 26. 29 Jobs to be done must incorporate technical, functional AND emotional benefits Emotional How the product / experience makes the client feel – "the Tone" Functional What the product / experience provides to the client – "the Execution" Technical What the product / experience does/is –"the Offer" Culture – get away – a mini vacation every day Italy at arm’s length A place to meet, talk, work, relax Best coffee bean Proprietary equipment Convenient locations Wide range of traditional and innovative products • Espresso based • Tea • Pastry, food Nice, warm bars with comfortable seating opportunities, music, newspaper, contemporary crowd Trust and transparency Reassuring me, e.g., education Making me feel important, e.g., empathetic customer service Vehicles for capital preservation (don't lose money) and growth (make more money) Example Dimensions in InvestingExample: BCG’s Benefit Ladder Secure retirement / comfortable lifestyle (i.e., match returns to liabilities and obligations) Provide job security Provide diversification; access to specific sectors Experience / Jobs to be done fx
  27. 27. Money holders want many “jobs done” not just “generate returns” from money managers There are many unexplored gaps that retail investors want and mutual funds can create disruption around
  28. 28. 31 Unexplored gaps that retail investors want and mutual funds can create disruption around • Capital preservation
  29. 29. 32 Peace of mind – high net worth investors Optimal diversification (risk parity)
  30. 30. 33 Inflation Protection • Bridgewater Associates • Many argue gold offers inflation hedge
  31. 31. 34 Capital preservation – retirees • Cash management
  32. 32. 35 Job security – allocators at institutional investors • Insurance protection for job loss
  33. 33. 36 Political interests – Sovereign Funds • Capital transfer to political stability
  34. 34. 37 Religious views – sharia compliant family offices and funds
  35. 35. 38 Returns – high risk investors • Adrenaline Fund - Optimizes for returns, and deprioritizes everything else - Team only invests in about 5-10 trades/year. - poor diversification but, they believe, prospectively high returns • Angel Investing - Highest returning asset class - median returns of 18% to 54% across 12 academic studies - offers terrible liquidity and transparency
  36. 36. 39 Exposure to target sector – retail investors
  37. 37. 40 Transparency – institutional investors • Optimal portfolio construction • Access to new asset classes
  38. 38. 41 Investment team stability – institutional investors
  39. 39. 42 Tax minimization – retail investors • Tax optimization
  40. 40. 43 Relationships with other investors and investment teams – endowments • Capital Preservation
  41. 41. 44 Networking – subset of retail investors
  42. 42. 45 Social welfare - millennials • Savings discipline
  43. 43. 46 Liability matching • JP Morgan • Numerous others
  44. 44. 47 Low Expenses • Vanguard - Focus on indices require minimal research - Highly unusual status as an money manager • ETFs (BlackRock iShares)Highestreturning asset class - median returns of 18% to 54% across 12 academic studies - offers terrible liquidity and transparency • Wealthfront • Betterment • JP Morgan • Numerous others
  45. 45. 48 46 16 34 14 10 9 39 74 57 Share of net flows, excluding money market funds Small Medium Large 2008-20142001-2007pre-2001 Note: Data correspond to US mutual funds excluding MMFs. US mutual funds data include ETFs. Pre-2001 refers to the time period between 1991 and 12/2000. Asset manager size categorization based on 2US AuM: Large (> $BN 250), Medium ($BN 100-250), Small (< $BN 100) Source: Strategic Insight; BCG analysis Largest managers capture nearly all net flows into US market – net flows to other managers down significantly in 2014, top 10 largest firms captured 120% of net flows Money Manager 2014 net flows ($B) Cumulative share of total net flows Vanguard 219 55% BlackRock 98 80% Dimensional Fund Advisors 27 87% TCW 26 93% Dodge & Cox 26 100% J P Morgan Chase 25 106% Goldman Sachs 15 110% Natixis 15 114% SSGA 14 117% TIAA-CREF 13 121% Total Market 397 73%2013 ratios Over the last 20 years, the largest firms have captured nearly all net flows xx: New player in top-10 ranking in 2014, compared to 2013 rankings
  46. 46. 49 Call to Action • Better serve retail investors • Create a way for users to be more engaged in investing • Have incentives so that more value accrues to ultimate beneficiaries by creating and enforcing an industry-wide set of standards and benchmarks – Alternatively, create business models that better align incentives of the money manager with inventive of investors • Helping underfunded US pension funds may require political reform – Balance needs of employees in one firm benefiting from a Defined Benefit Plan (DB) vs. those on a Defined Contribution (DC) plan • Transition to a new generation of managers needs to happen without disruption – Emerging leaders can scale and innovate to provide the full spectrum of “jobs to be done” – There is an emerging niche of service providers which can help existing money managers grow their leadership and effectively manage the transition
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  48. 48. • Macro Trends • Overview of Disrupt Investing Appendix (DI)
  49. 49. 53 The world economy is entering a period of slower growth Lower levels of productivity growth in the US, Europe and Japan • Developed world productivity growth falls below 1% • High levels of indebtedness ($57 trillion increase to $200 trillion since 2007) • New sources of innovation needed China slowing down as it converts from an export to a consumption economy • China falls to 7.4% GDP growth lowest in a quarter of a century • Potential credit bubble and structural challenges to defuse
  50. 50. 54 Average life expectancy projected to exceed 75 years in 2050 Rise in aging population • Global life expectancy increased from 48 years in 1950-1955 to 68 in 2005-2010 and is projected to be 76 by 2050 (up to 34% of population in Western Europe to be over 60)1 • Life expectancy in many developed countries was 74-80 in 2009 (e.g. 78.5 in the US, 80.2 in Germany in 2012)2 • The age wave is arriving at different times in each country • The aging population and especially the aging of the baby boomers is increasing the spending power of elderly people • High categories for spending include housing, health care, financial services, appliances and travel • Baby boomers control over 80% of personal financial assets and over 50% of discretionary spending power in the US3 • Senior home equity owned by Americans aged 62+ is estimated at $3.2 Trill in 2012 and equals ~ 40% of total US home equity 4 • US industries focused on elderly people (60+) were worth over $1.4 Trill in revenues in 2011. In 2007, seniors represented 80% of all US luxury travel and typically spend 74% more on vacations than the 18- 49 year old population5 • In 2011, Medicare, a US government insurance program for elderly, represented 24% of all prescription drug expenditures (~$ 63 Bill) and is expected to rise to $124.4 Bill by 2020 (27%).6 US Medicare expenditures for nursing care facilities will increase from $31.9 Bill in 2010 to $72.7 Bill in 20206 2050E 76 2030E 73 2010 69 1990 Average life expectancy (Years) 75 60 0 CAGR +0.47% 90 65 1970 58 1950 47 • Increased longevity • Rise in health spending • Active seniors Source: 1 and Graph. United Nations, Pop Div, DESA, BCG Analysis; 2. Centers for Disease Control & Prevention, NCHS; CIA World Factbook 3. Press search 4. National Reverse Mortgage Lenders Association; Freddie Mac April 2013 presentation. 5. Pepper Institute on Aging & Public Policy, Facts on Aging: Rise of the Silver Industries (2007); 6. National Health Expenditure Projections 2011-2021; US HHS, CMS Description of rise in aging population How big is it really? • Un-retirement • Pension crisis Related Megatrends Terra Trends Demographics
  51. 51. 55 Increased role of women • Women have an increasingly important role in society illustrated by three key areas: – Labor market participation is steadily rising since the 1980s in developed economies – Increase of women in leadership roles both in public and private sectors – Women consumers will continue to be important as they are expected to control two-thirds of US consumer wealth over the next decade and represent over $5 Trill in purchasing power1 • Female labor force participation is steadily growing in developed countries from 154 Mill (1990) to 184 Mill (2005)2 • Growing involvement of women in public life over the past decade is shown by the increase of women in parliament in the UK from 60 (1995) to 146 (2012), in France from 33 to 155 and in the US from 51 to 772 • Female participation in private sector leadership roles is also growing. In 2012 there were 20 female CEOs in Fortune 500 companies up from 0 in 1994, 3 in 2001, and 12 in 20073 • Men accounted for 5.4 Mill, or 71%, of the 7.5 Mill jobs that disappeared from the US economy December 2007-June 20094 • In the UK the pay gap has also continued to decrease (by 60% in the period 2000-20105) 27 31 38 44 51 54 60 63 63 30% 40% 50% 60% 0 20 40 60 80 1970 1975 1980 1985 1990 1995 2000 2005 2010 Women (20+) employees in US, Mill Share of women in total employed workforce (%) • War for talent • Fertility • Education • Gender parity Source: Source: 1. Nielsen press release, US Women Control the Purse Strings 2apr2013; 2. Inter-Parliamentary Union 3. 4. and graph US Bureau of Labor Statistics; them/; 5. Description of increased role of women How big is it really? Related Megatrends Female influence growing (US example) Terra Trends Demographics
  52. 52. 56 Apple ecosystem sales rose 20 times over last 8 years • Globalization and the Internet have increased competition and made it harder for products to be considered unique. Customers increasingly seek to use their consumer choices to express their individuality from ring tones to iPods • Customization is "producing goods and services to meet individual customer's needs with near mass production efficiency".1 Companies profit from customization by being able to increase the margins for customized products • Customization allows companies to adapt for client needs by: – Offering customers options to create unique products after sale (e.g. Sleepnumber mattresses allowing for firmness variety) – Creating products that reflect and build in individual customer preferences before the sale (e.g. unique colors, features, fit) – Creating a product mass-produced to exactly fit the needs of an individual consumer (e.g. tailored jeans, running shoes modeled on individual footprint) Growth of customization • Individualization • Diversity • More companies are launching customized products: Kraft, Mars, Wrigley, Nike, Adidas, Dell, Ford, Levis, Apple. One of the most successful customization projects, NikeID reported sales of >$100 Mill with 15 Mill online users in 20092 • The iPod has revolutionized the music industry allowing for unprecedented customization of music to suit the mood of the consumer. Launched in October 2001, iPod sales reached ~51.6 Mill units in 2007 growing at an average annual rate of 129%3 • Similarly, DVR technology that allows customers to control and customize their television experience has reached 44% of US households4 • The ringtone market (valued at ~$2 B in the US and Europe and India in 2006) is another demonstration of growing customization5 Source: 1. Tseng, M.M. & Jiao, J. (2001), Handbook of Industrial Engineering, Technology and Operation Management; 2.; 3 and graph. Apple 10K filings 2004-2012 ; 4. USA Today; 5. BMI; the International Herald Tribune (2007); - 0 40 20 60 Sales of the Apple ecosystem ($ Bill) CAGR+53% 2011 34.1 2009 2010 18.2 12.1 2008 12.5 2007 10.8 2006 9.6 2005 5.4 2004 1.6 2012 46.6 iTunes iPod iPad CAGR (%) 156 (2010–2012) 20 (2004–2012) 53 (2004–2012) • Brand affinity Description of growth of customization How big is it really? Related Megatrends Terra Trends – Consumer
  53. 53. 57 Description of rise of consolidation/M&A M&A market: fluctuating around $2 Trill in post-crisis times • Scale economies • Brand affinity Rise of consolidation/M&A Related Megatrends • Since the 1900s, there have been six distinct waves of M&A. The last wave, which took place in 2004-2007, was mainly about consolidation • Globalization, more liberal regulatory environments, unparalleled funds for M&A, and competitive pressures for scale benefits have fueled consolidations. Cash-rich corporations are finding M&A particularly attractive since their cash flow can service much of the cost of the acquisition • Reasons to consolidate can include access to new products or markets, cross selling, potential synergies, tax benefits, diversification, access to cash, or increased control of the value chain • Many companies actively grow through M&A (e.g., Oracle closed ~70 transactions with a total value more than $40 Bill between 2002-2011) • An increasing percentage of deals are in Asian countries. Average transaction value in Asia/Pacific hit a record $65 Mill in 20101 • The overall M&A market fluctuates. In 2008-2011 annual global M&A value was $1.6-$2 Trill, 2 times lower than the record $3.8 Trill in 20071. However, the number of transactions decreased from ~36,000 in 2007 to ~28,000 in 2011 • The average value of a single deal went down from $100+ Mill in 2007 to $57 Mill in 2011, reaching the levels of the previous recession in the early 2000s ($53 Mill in 2002)1 • Americas still account for about half of the deals in value (average 48% for 2008-2011). In volume, Europe has led since 2007 (~12,100 deals in 2011, Americas ~9,900 deals)1 • In 2008-2010 deal premiums were ~40%, which is above historical average (~36% for 1990-2010) and higher than in 2002-20072 • In 2010, transaction fees (measured as percent of deal) rose from ~0.4% in 2004-2008 to 0.6% in 20102 1.6 ’00 3.2 ’99 3.0 ’98 2.4 ’97 1.6 ’96 1.0 ’95 0.9 ’94 0.5 ’93 0.4 ’92 0.3 ’91 0.3 ’90 0.4 3 2 1 0 ’11 1.6 ’10 2.1 ’09 1.6 ’08 2.3 ’07 3.8 ’06 3.3 ’05 2.5 ’01 1.7 ’03 1.2 ’02 1.1 # transactions ('000) ’04 30 20 10 0 M&A deals value ($ Trill) 4 40 M&A deal value ($Bill)# transactions (’000) • Rise of alternative investment vehicles Source: 1. Thomson Financial, BCG analysis 2. BCG, Riding the next Wave in M&A Econo Trends – Economy & Employment How big is it really?
  54. 54. 58 CAGR, % '00 – '10 Private capital flows to developing countries: $1.2 Trill in 2010 • Immigration • Wealth disparities Related Megatrends • Capital flows to developing countries have grown 3 times from $378 Bill in 2000 to $1.2 Trill in 2010 • Net official flows were unstable: from a record $177 Bill*** outflow in 2006 to $138 Bill peak inflow in 20091 • Flows from international capital markets grew from $150 Bill in 2000 to $353 Bill in 2010: – Equity investments are fastest growing and most volatile segment with $128 Bill in 2010 from $14 Bill in 20002 – Bond investments peaked in 2008 and 2010 (~$100 Bill p.a.) and fell around $20-30 Bill p.a. in other years2 • Net FDI to developing countries experienced fastest growth in 1990s: from $35 Bill in 1990 to $217 Bill in 1999. In 2000s, net FDI was unstable, rising from $177 Bill in 2003 to record $490 Bill in 2008 and declining to $327 Bill in 2010 due to the recession1 • Remittances sent home by developing country migrants show most stable flow reaching $321 Bill in 2010 from $79 Bill in 2000 (15% CAGR)2 Rise in capital flows to developing countries (*) Foreign direct investments (**) The G8 met at the Sea Island Summit in 2004 and decided to lower costs for migrant workers to send money back to families and friends leading to the development of formal channels with lower costs in various G8 countries (***) Hereinafter all the numbers are in current (inflation- adjusted) US dollars Source: 1. IMF, World Economic Outlook data, September 2011 2. World Bank, Global Development finance data (2012) Graph: sources 1 and 2, BCG analysis 565 ’03 424 ’02 356 ’01 359 ’00 378 779 999 ’05 ’06 Private capital flows to developing countries (current $Bill) 1,800 1,341 1,200 600 0 CAGR +12% ’10 1,183 ’09 1,005 ’08 1,223 ’07’04 International capital marketsForeign direct investmentWorkers’ remittances 9.0 13.1 15.1 • Next billion and rising middle class • Rise of RDE • Capital flows to developing countries include official flows (net total disbursements by the official sector of the creditor country to the recipient country) and private flows • Private flows comprise financing via international capital markets (debt and equity flows), worker remittances, and net FDI* (including private equity and strategic investments) • Private investments have increased since 2000 particularly given growing interest in East Asia and Pacific countries • Net FDI has increased since 2003 due to developing countries policies to attract direct investments • Remittances are steadily growing due to the creation of mechanisms to encourage expatriates to send money back to their countries** Description of rise in capital flows How big is it really? Econo Trends – Financial flows/Investment & Instruments
  55. 55. 59 • Rise of capital flows to developing countries • Rise of private equity Related Megatrends • AIV is an investment product other than traditional investments such as stocks and bonds, money markets and/or cash • Major segments of AIV market include mutual funds, derivatives (both OTC and exchange-traded), hedge funds, private equity and venture capital funds, and real estate investment trusts(REITs) • AIV concept was created in the1980s and grew in the 1990s with the development of real estate investments, international funds, emerging market funds, financial deregulation, and mutual funds • In the 2000s, AIV became increasingly popular with the rise of instruments such as financial derivatives, hedge funds, private equities (PE), venture capital (VC) and securitized products, such as commodities (spot and future), timber rights, energy futures, carbon credits, etc. • AIV offer a broader range of products as well as approaches for hedging risk and the potential for higher returns and higher risk Rise in alternative investment vehicles (AIV) (*) The traditional investment market reflects the total world stock market capitalization, bonds outstanding and value of deposits (**) Mid-year gross market value of OTC and exhange-traded derivatives Source: 1 and Graph: Datamonitor, Global REITs (2009-2011); Preqin; HFR, HFR Global Hedge Fund Industry Report (2011); BIS; ICI, Investment handbooks (2009,2011), Cerulli; Datamonitor, Global Capital markets (2011); BCG analysis and estimates 45 30 15 0% Alternative Vehicles ($ Trill) 80 60 40 20 0 CAGR +9% 2011 54.1 2010 Alternative Vehicles (% Traditional) 2009 55.6 2008 46.2 2007 44.8 2006 38.9 2005 34.1 2004 27.0 2003 26.2 60 58.1 Mutual funds Derivatives** PE/VC Hedge funds REIT % Traditional 8.2 10.7 11.8 '03 – '11 CAGR, % 16.3 1.4 8.2 • Financial derivatives • Rise of commodity investing Alternative vehicles: $54.1 Trill in 2011 • In 2011, AIV were $54.1 Trill (9.5% CAGR), while traditional investments have reached $213 Trill (8.5% CAGR).1 In 2003, AIV market was valued at $26.2 Trill while traditional represented $110.9 Trill1 • Alternative vehicles (except for derivatives) outperformed the traditional market in 2003-2007 (e.g. hedge funds had CAGR 23%, vs. traditional market growth of 14%)1 • The largest AIV are mutual funds ( AuM $26.5 Trill in 2011 up from $14.1 Trill in 2003). Derivatives are the second largest market (gross market value $21.8 Trill in 2011--OTC derivatives alone are $19.5 Trill)1 • REITs have demonstrated the most serious decline during the crisis from $1.7 Trill AuM in 2006 to $568 Bill in 20091 • PE/VC is fastest growing AIV from $870 Bill AuM in 2003 to almost $3 Trill in 20111 Econo Trends – Financial flows/Investment & Instruments Description of rise in AIV How big is it really?
  56. 56. 60 Rise in socially responsible investing • Corporate social responsibility • Rise in NGO's, non-profit Related Megatrends • Socially responsible investing (SRI) is growing as part of a greater focus on corporate social responsibility and investor interest in socially responsible companies • SRI describes an investment strategy which combines the intentions to maximize both financial return and social good • In general, socially responsible investors favor corporate practices in line with environmentalism, consumer protection, quality, and diversity • Indices such as DJSI and FTSE4Good track the evolution of the most sustainable companies and are indications of targets for SRI investors • There are already several significant SRI funds, such as the Ariel Fund ($1.63B AuM (assets under management)), and Pax World Balanced Fund ($1.74B AuM)1 • SRI is a growing market in both the US and Europe with AuM's CAGR of 22% between 2003-2010. AuM reached a total of $10.6 Trill in 2010, up from $2.6 Trill in 20032 • SRI in observed markets were affected by the crisis in different ways: – In EU, SRI market increased from $3.7 Trill AuM in 2007 to almost $7 Trill in 20092 – In the US, SRI has continued to grow reaching $3.1 Trill in 2010 (4.2% CAGR)2 – In Japan, AuM went down from $7.1 Bill in 2007 to $6.2 Bill in 20093. A similar trend occurred in Canada • The asset allocation of socially responsible funds is multi- geographic. In 2009, emerging markets comprised 37% of portfolio of EU funds and 20% of US funds4 Socially responsible investing AuM ($T) 15 10 5 0 CAGR +22% 2009/2010 10.6 2007 7.0 2005 4.1 2003 2.6 Europe United States Canada** Australia/NZ Japan SRI portfolios grew 5 times since 2003 • Eco-investing Note: DJSI is Dow Jones Sustainability Index Source: 1. 2. Eurosif 3. SIF Japan 4. IWG/SIF, Emerging Markets Investor Survey Report Graph: Social Investment Organisation, RIAA and sources 3-4 Description of socially responsible investing How big is it really? Econo Trends – Financial flows/Investment & Instruments
  57. 57. 61 • M-commerce/market for mobile devices • Networks Rise in E-trade and -commerce Related Megatrends • E-commerce/ e-trade consists of the buying and selling of products, services, securities, etc. over electronic systems • E-commerce includes business-to-business (B2B) which represents 90% of the e-commerce global market and business-to-consumer/ consumer-to-consumer (B2C/C2C) which represents the remaining 10% • This megatrend appeared in1991 with the opening of the internet to commercial use, the development of electronic funds transfer, internet marketing, online transaction processing, electronic data interchange, inventory management systems, and automated data collection • NASDAQ and Globex are examples of electronic market places used by e-traders. Mobile commerce (m-commerce) is a new rapidly growing stream of buying and selling of goods via wireless handheld devices • B2B e-commerce has doubled in the last 5 years from $6.4 Trill in 2007 to estimated $12 Trill in 2012.1 B2C e-commerce grows at an average rate of 16% per year and is expected to reach $1 Trill in 2012 and $1.6 Trill in 20151,2 • 65% of US online population shopped online in 2011 (vs 55% in 2005) and is predicted to be 70% by end of 20163. In Western Europe 68% of online adults will purchase online by 2015 (compared to 50% in 2005).4 3 countries (US, UK, Japan) still command more than half the global e-commerce market, but the highest growth in 2011-2015 will be in Spain (37%), Brazil (29%), and China, Russia, & Mexico (all 26%).5 In the UK, 12% of retail sales ($80.7 Bill) were online in 2011 (up from 8.4% in 2008), the highest in Europe.7 US e-retail sales will be $248.7 Bill in 2014 (8% of total projected retail sales) driven by 10% growth YoY.6 $119 Bill of global goods and services will be purchased on a mobile phone in 20152 Global e-commerce market ($ Trill) 15 10 5 0 CAGR +30% 2012E 13.1 2010 9.6 2008 7.3 2006 4.9 2004 2.6 2002 0.9 B2B B2C CAGR, % 2002–2012 31.3 21.9 • New innovations models • Time compression/efficiency E-commerce to hit $13 Trill in 2012 Source: 1. IDC, Worldwide Internet Usage and Commerce 2005-2009, Global e-commerce 2009- 2013 2. ABI Research, Mobile Commerce 3. JP Morgan, Nothing but Net 2011 4. Forrester Research, Inc (2006, 2011), EIU Market Indicators and Forecasts (2012), BCG analysis 5. Forrester, Online Retail Set For Continued Double-Digit Growth (2011), CISCO , Global E- commerce Gold Rush 6. Reuters "US Web Retail Sales", March 8, 2010 7. Center for Retail Research, Online Retailing: Britain and Europe. Graph: sources 1 and 3, BCG estimates Description of e-trade and e-commerce How big is it really? Econo Trends – Trading Blocks & Flows
  58. 58. 62 Income inequality in the US increased over last 60 years • Immigration/ethnic diversity • Global divide Rise in global divide • Wealth disparities refers to the unequal distribution of financial assets among people both within and between countries • Global divide refers to gaps in wealth, digital access, education, and even health outcomes within and between countries • One measure that is commonly used to capture inequalities of wealth distribution is the Gini coefficient. It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal wealth distribution, while a high Gini coefficient indicates more unequal distribution • Digital divide • Next Billion 2009 US Gini coefficient, % 50 40 0 CAGR +0.4% 46.8 2000 46.2 1990 42.8 1980 40.3 1970 39.4 1967 39.7 1947 37.6 Source: 1. ONU Wider - World wealth inequality (Dec. 2006) Pioneering Study Shows Richest Two Percent Own Half World Wealth, UN WIDER, World Distribution of Household Wealth 2. Global Risks 2012. World Economic Forum 3. and Graph: US Census Bureau. 4. "Divided we stand. Why inequality keeps rising" OECD 2011; average of 19 OECD countries How big is it really? Related megatrends Description of global divide • The richest 2% of adults in the world own more than 50% of the global private wealth while the bottom 50% owns barely 1%1 • The global wealth Gini co-efficient for adults is 89%. The same degree of inequality would be obtained if one person in a group of ten takes 99% of the total pie and the other nine share the remaining 1% • Residents in Japan and USA represent, respectively 27% and 37% of the 1% world's richest individuals • "Severe income inequality" was selected as the most likely global risk by 2012 Davos World Economic Forum participants2 • Over last 60 years in the US the Gini index increased from 37.6% in 1947 to 46.8% in 20093 • Income inequality in OECD countries is at its highest level in the last 50 years. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago4 Econo Trends - Wealth Creation & Dispersion
  59. 59. 63 Next billion consumers Related Megatrends • Next billion consumers are 500 Mill low-income individuals in RDE2 whose potential to become profitable customers has been historically underestimated • It has been estimated that one third of their monthly expenditure goes towards non-essentials creating an opportunity for players that manage to find the appropriate business model • Fluctuating incomes, lack of traditional infrastructure, and retail access are some of the key needs of this segment • Considering the constraints and needs of this consumer group, companies need to understand their needs and look beyond the stereotypes to serve the segment in creative ways • Commoditization • Wired vs. wireless • Trade and communications • Emerging middle class 1. (inside the graph) - Percentage of Indian households in each strata, Annual gross household income based on 2010 prices (different sources use different cut off ranges); 2. Such as BRIC (Brazil, Russia, India and China), some countries of Africa, central and Eastern Europe; Note: It was considered households with a daily income between $1 and $2 (for India between Rs90k and Rs200k of annual income); Source: 3. BCG analysis. Brazil: IBGE-PNAD database (2006); Russia and China: EIU figures (2008); India: EIU pop/HH ratio (2010); Graph. NSS Household consumption expenditure survey 2010 ; NCAER Great Indian Middle Class report 2001-02 How big is it really?Description of next billion consumers 103 75 53 41 29 0 50 100 150 Next billion consumer in India (Million of households) +5% 2010200620021996 2020E There will be ~103M next billion consumers in India by 2020 Top End (4%) >$37k Middle Class (23%) $7.4k - $18.5k The Subsisters (28%) <$3.3k The Next Billion (36%) $3.3k - $7.4k • Next billion consumers represents ~$1 Trill market opportunity3 – Spread over ~390 Mill households, ranging from 1.2 to 1.5 Bill people – In India, it includes ~75 Mill households, with ~$150B while in Brazil, it represents ~61% of the entire population – Average Indian household income estimated to increase ~3 times over the next decade3 • BCG estimates if the next billion consumers were in one nation, it would be the 10th largest economy in the world in terms of GDP3 • Next-billion households earn, per month, between $100 and $700 in Brazil, while in India incomes range from $74 to $333 and in China between $63 and $375 Econo Trends – Globalization
  60. 60. 64 Related Megatrends • Emerging middle class earns between $8,000 and $18,000 in PPP and most of the income goes to non-essential expenditure (60% compared with 1/3 in the next billion consumers) • Education, high levels of economic growth in RDE and a basic shift from agriculture to manufacturing and services sectors are some of the main reasons behind the emergence of the middle class • The global middle class is now beginning to participate actively in the global marketplace, demanding world-class products, and aspiring to ownership of major household durable goods, such as telephones, computers and automobiles Note: It was considered households with daily income between $2 & $10 (for India between Rs200k & Rs1,000k of annual income); 1. (inside the graph) - Percentage of Indian households in each strata; Source: 2.. BCG analysis. Brazil: IBGE-PNAD database (2006); Russia & China: EIU figures (2007); India: BCG research & EIU pop/HH ratio (2010); Graph. NSS Household consumption expenditure survey 2006; NCAER Great Indian Middle Class report 2001-02; 3. World Bank - Global Economic Prospects, 2008 4. The growing middle class in developing countries and the market for high-value food products, Benjamin Senauer (2003); 5.Schroder Ventures,, 2000; China's Middle Class, CNN Money, 2012 How big is it really?Description of rising middle class 66 34 14 4 21 0 20 40 60 80 Middle Class in India (Million of households) 2006 +13% 2020E20101996 2002 ~66 Mill middle class consumers expected in India by 2020 Top End (4%) >$37k Middle Class (23%) $7.4k - $18.5k The Subsisters (28%) <$3.3k The Next Billion (36%) $3.3k - $7.4k Rising middle class • Next billion consumers • Trading up/down • Commoditization • Trade & communications • Global middle class represents 400 Mill people, while by 2030, it is expected to reach 1.3 Bill people in developing countries (15% of the world population)3 • The middle class will increase their purchasing power from $2,149 per capita in 1999 to $5653 per capita in 2020 and $16,500 in 20404 • Emerging middle class in India is growing at 13% per year (CAGR 1996- 2020) and represents 34 Mill as of 20102 • In India, penetration of basic durable goods already represents 82% of the total segment, while telecom and financial services are used by 92% and 79% of the market2 • Companies started focusing on RDE middle class; Schroder Ventures invested $100 Mill to target this market, specifically in the retail and health care industries5 • In China, middle class is estimated to be more than 300 million and is larger than the entire population of United States6 Econo Trends – Globalization
  61. 61. 65 Rise of IT communities and Web 2.0 Related Megatrends • "Web 2.0" was used for the first time in 2004 and refers to the "second generation of Internet" characterized by a new generation of web applications that provide for more dynamic user participation, social interaction, and collaboration • Online communities and social networking sites have exploded -- in 2010, the top 5 social networks sites had ~2 Bill registered users (26% increase)1 • IT communities are playing an important role in the consumer purchase process, with increasing numbers of internet users seeking out shopping information from online communities • Companies are working to leverage and monitor this trend, building communities that turn into powerful marketing assets by allowing customers to share experiences and reviews and to participate in the development of new products • In 2010, there were 2 Bill internet users globally. In 2015, this number is expected to be around 2.7 Bill (6.2% CAGR)2 • YouTube, bought by Google in 2006 for $1.65 Bill, is now the 3rd most visited site after Google and Facebook.3 In February 2011, 800 Mill users watched over 90 Bill videos.4 Facebook, the most popular social network site3 reported 845 Mill unique visitors in December 2011 (a 75% CAGR from 2007).Facebook IPO is one of the biggest technological IPOs5 • Worldwide online social network advertising spending is expected to be $5.5 Bill in 2011 (up from $0.5 Bill in 2006)6 • eBay, the largest online auction site had sales of $9.2 Bill in 2010 (36% CAGR since 2000).7Amazon, whose success was largely driven by user ratings, reviews, and recommendations had projected revenues of $48 Bill in 20118 • Wikipedia, an online community edited encyclopedia, contained more than 21 Mill articles in over 200 languages9 • Trade and communications • E-trade, e-commerce • Networks Total internet advertisement (%) 15 0 Worldwide social network advertisement revenues ($ Bill) 5 10 0 2013E2012E2011E20102009200820072006 5 10 • New media • New innovation models Social network ad revenues rise 20 times Source:1. comScore World Metrix (2008); 2.IDC, More Mobile Internet Users Than Wireline Users in US, 2011 3. Alexa, Top Sites 4. YouTube, Statistics 5. Factiva lit search 6. and Graph: eMarketer October, 2011 7. eBay 2010 Annual Report 8. Amazon 2011 Annual Report 9. Wikipedia How big is it really?Description of IT communities and Web 2.0 Tech Trends – Platforms & Connectivity
  62. 62. 66 Rise in networks • Computer and telecom networks are at the core of today's globalized and interconnected world, and allow communication and interaction regardless of physical proximity • Present in every aspect of modern personal and professional life, networks range from small home networks to vast global networks like the World Wide Web • Future trends include further advances in broadband, mobile services, digital broadcasting and information access that will lead to the convergence of separate technologies and creation of ubiquitous networks. These networks allow for exchange of information at any time, anywhere, from any appliance through the use of broadband and mobile access as well as intelligent home appliances1 • The global networking equipment market was $137.8 Bill in 2010, with a 3.2% CAGR from 2006. Routers and switchers proved the most lucrative market in 2010, generating revenues of $61 Bill. The market is forecast to reach $184 Bill in 2015 (6% CAGR for the 2010-2015 period)2 • The market for home networking hardware is increasing. In 2007, ~92 Mill network-enabled consumer electronics and media devices were shipped, a number that is expected to grow to 460 Mill in 2012 (38% CAGR)3 • IPv4, although allowing for more than 4.2 Bill unique addresses, was exhausted in Feb 20114 • Social networks are also reshaping organizations. For example, NGOs rely on large social networks to mobilize public support and voluntary aid contributions to link with community groups in developing countries, and work in areas where government initiative is not possible • The number of internet-connected devices passed 5 Bill in 2010 and is forecasted to reach 22 Bill in 20205 • Communication • Bandwidth • IT communities, Web 2.0 Related Megatrends Global networking equipment market ($Bill) 200 150 100 0 CAGR+6% 2015E 184 2014E 174 2013E 164 2012E2009 132 70 138 2006 2008 2010 146 121 2011E2007 132 155 127 2003 • RFID, sensor networks • Wireless communication Global networking equipment to reach $185 Bill by 2015 CAGR+13% Source: 1. Japanese Ministry of Public Management, Home Affairs, Posts and Telecommunications; Building a Ubiquitous Network Society That Spreads Throughout the World (2004) 2. and Graph: MarketLine, Global Networking Equipment 2011 3. ABI Research, Home Networking and Digital Home Network (2007) 4. Number Resource Organization, "IPv6 adoption at critical phase", February 2011 5. IMS Research press release, Internet Connected Devices About to Pass the 5 Billion Milestone, August 2010 How big is it really?Description of Networks Tech Trends – Platforms & Connectivity
  63. 63. 67 Related Megatrends Rise in mobile electronic devices • Mobile electronic devices (MED) are capable of performing an increasing number of tasks like Internet access, voice, messaging, social networking, high-quality multimedia capabilities, data processing, games, GPS, among others • MED include a range of portable devices such as PDAs, smartphones, tablet PCs, portable media players, etc • Technological advances and rising customer demand for intelligent and multimedia-rich mobile experiences will continue to propel the growth of this market • Next applications will include m-commerce, location based services, and biometric identifiers for increased security • The smartphone market reached $99 Bill in 2010,1 representing 10 times growth from ~$8.6 Bill in 2006.2 Smartphone shipments rose from 118 Mill in 2007 to 468 Mill in 2011 and will reach 1.1 Bill in 2015.3 Smartphones could represent around 55% of the mobile phone market in 20154 • Laptops outsold desktops for the first time in Q3 2008. Smartphone shipments are predicted to overcome sales of PCs (desktops and laptops) in 20125 • The market for tablet PCs is booming: from 2 Mill in 2009 to 64 Mill in 2011 and forecasted at ~250 Mill in 20156,7 • In 2008, smartphone penetration in the mobile phone market was 6.4% (US), 8.6% (Germany), 10.6% (UK), and 6.1% (France). In 2011, it rose to 46% in the US; with smart phone percent of all cell phone users 44% for France, Germany, Italy, Spain and UK combined8 • Communications • Wired vs Wireless Worldwide shipment, Mill 1,500 1,000 500 0 CAGR +72% ''15E 1,353 '14E 1,096 '13E 889 '12E 723 '11 535 314 '09 176 '08 151 '07 118 '06 82 '05 53 '04 22 '03 7 '10 Smartphones Tablets CAGR 2011–2015 24% 39%• Mobility • Rise in m-commerce Smartphones and tablets shipment to exceed 1 Bill in 2014 CAGR +26% Source: 1. Strategy analytics, Smartphone Revenues Hit US$ 99 Billion in 2010 and Apple Takes Lion's Share of 29% March 2011 2. BCC Research, The Future of Mobile Computing (2007) 3. IHS iSuppli Corp (2007), Gartner, IDC 4. IHS iSupply, By 2015, smartphones will rule the mobile planet, August 2011 5. Morgan Stanley, 10 Questions Internet Execs should ask and answer 6. IHS iSuppli Corp (2007), Transparency market research 7. Strategy Analytics, Android Captures Record 39 Percent Share of Global Tablet Shipments, January, 2012 8. M:Metrics, Inc., Survey of mobile subscribers (2008), Nielsen, comScore Graph: Sources 3,6 and 8, Canalys, IDC, BCG analysis How big is it really?Description of rise of mobile electronic devices Tech Trends – Platforms & Connectivity
  64. 64. 68 Rise of wireless communication Related Megatrends • Wireless communication is the transfer of information over a distance without the use of electrical conductors or "wires" • Wireless encompasses various types of mobile and portable two- way radios, mobile phones, and smartphones. Other examples include GPS units, garage door openers and/or garage doors, wireless computer mice and keyboards, and satellite television • Most of the currently used technologies were released/adopted: in the last 15 years: GPS (1994), Wi-Fi (1997-1999), Bluetooth (1999 - 2002), WiMAX (fixed in 2001 and mobile in 2005), 3G (2001), 3G+ (2008), 4G/LTE (2009) • In developing countries, there is a huge potential for wireless growth, as governments are driving the growth of broadband wireless in order to reduce the digital divide • Global wireless telecommunication services market grew by 6.8% in 2010 to $890.9 Bill. In 2015, the market revenue is forecast at $1.28 Bill (7.5% CAGR).1 The wired (fixed line) market, with a value of $550.6 Bill in 2010, is slowly declining (forecast at $524.3 Bill by 2015, shrinking 4.8% since 2010)2 • Number of mobile subscribers is forecast to rise to 6 Bill in 2014, up from ~1.6 Bill in 2004 (14% CAGR), making wireless one of the most ubiquitous technologies in the world. In the same period, telephone lines are expected to decrease from 0.97 Bill to 0.72 Bill3 • Mobile broadband (3G and 3G+) is expected to reach $137 Bill in 2014, 4.5 times growth since 2008.4 Global 3G penetration has risen from 11% in 2008 to 17% in Q2 20115 • There is a rapid switch between technologies. In 2006 WiMAX was treated as the highest-potential technology. However, by 2010 more than 100 operators worldwide declared they will switch to LTE (4G). LTE infrastructure revenues are estimated at $8 Bill in 20116 • Bandwidth • IT communities, Web 2.0 2008 3.3 200620042002 1.1 20001998 0.3 1996 Telephone main lines Mobile subscribers # subscribers (Bill) 6 4 2 0 2014E 6.0 2012E2010 • Smart devices • RFID, sensor networks Widening gap between wireless & wired subscribers Source: 1. Datamonitor, Wireless Telecommunication Services (2011) 2. Datamonitor, Fixed Line Telecoms (2011); 3. and Graph: EIU, Market Indicators and Forecasts (2012) 4. Ovum, Users of 3G, 4G services will grow to 2 billion in five years, March 2009 5. Morgan Stanley, Internet trends 2011; KPCB, Internet trends 6. ABI, Mobile WiMax Subscribers to Reach 59 Million by 2015, September 2010 How big is it really?Description of wireless communication Tech Trends - Technology
  65. 65. 69 Related Megatrends Rise in smart devices • Smart devices refers to placing sensors/chips in objects to make them "intelligent/sensing." Applications vary from smart houses, smart appliances, smart packaging, to smart vehicles • Smart houses represent a convergence between information technology (IT), telecommunication and electronics. Smart houses use computing to promote comfort, light and climate control, security, and entertainment • Models vary from simple automation of single appliances and single remote control to local integration and remote management. Intelligent appliances may be designed to predict occupant actions and needs, and to create an adaptive home • Smart vehicles are equipped with enhanced features, such as GPS, route guidance systems, intelligent cruise control function, automated parking • Driven by consumer electronic suppliers, service providers and telecommunication companies, the global home automation market is expected to reach ~$115 Bill in 2016, up from $45 Bill in 2010 (16% CAGR), with security, energy management, healthcare, information, entertainment and remote control among the fastest growing services.1 The Western European market of $215 Mill in 2010 is forecast to reach $284 Mill by 2015.2 US market for home automation was worth ~$3.2 Bill in 2010 and is expected to exceed $5.5 Bill in 2016 (10.5% CAGR).3 The Asia-Pacific home automation market is estimated at $0.5 Bill in 20114 • Since 1986, Honda has been developing humanoid robots to help with domestic tasks and assist a person confined to a wheelchair. The ASIMO can walk, avoid obstacles, and recognize voices of three people speaking simultaneously5 • Google received a patent for a landing strip (a parking slot for a driverless car) in 2011.6,7 As of 2010, vehicles drove 1,609 km without human intervention and 225,308 km with minimal human intervention6,7 • Efficiency and productivity • Networks • RFID, sensor networks Worldwide Domotics/home automation market, $ Bill 150 100 50 0 CAGR +17% CAGR +28% 2016E 115 2014E 84 2012E 62 2010 45 2008 33 2006 18 • Wireless communication • "Smart" packaging/grid/ transport/homes/appliances Home automation market to reach $100 Bill in 2015 Source: 1 & Graph. CMTresearch, Forecast: Domotics and Home Automation Market, Worldwide (2010); 2.Frost & Sullivan, European Home Automation Markets Report 3., 4. In-stat, Home Automation Trends in Asia, October 2007 5. ASIMO/index.html, press release November 2011 6. BBC, Driverless car: Google awarded US patent for technology, December 15, 2011 7. NY Times, Google Cars Drive Themselves, in Traffic, October 9, 2010 How big is it really?Description of smart devices Tech Trends - Technology
  66. 66. 70 Rise in internet access • The Internet is a system of computer protocols that allow users to connect and communicate, access information, send and receive information, and research and purchase products and services on-line. Internet applications include electronic mail, online chat, file transfer, funds transfer, interlinked web pages • As Internet use comes to define modern society, internet access is increasingly important for conducting and generating business, for access to information, and for communications The Internet is used for entertainment as well as commerce, for online gaming, music downloads, videos, shopping, education and more • Internet access is also a social phenomenon which has played a role in empowering users to find information, to generate their own content, and to track companies. User-generated content is transforming the world of marketing and we are entering a more transparent era • In 2011, there were ~1.89 Bill Internet users worldwide (up from 1.23 Mill in 2007).1 Global users are expected to continue to grow, reaching ~2.42 Bill users in 2015 (6% CAGR from 2011-2015 vs. 12% from 2007- 2010)1 • In 2011, Asia and Australia accounted for 47% of global Internet users (Europe was the second largest region with 19%, followed by North America with 15%). In 2015, Asia and Australia are expected to represent half of global Internet users, while North America will account for only 12%1 • The global Internet access market grew by 14.5% in 2010 to reach a value of $238.3 Bill. In 2015, the global market is forecast to have a value of $333.5 Bill (7% CAGR)2 • By 2014-2015, more users in the world will access the Internet through mobile devices rather than PC/wireline devices3 • IT communities, Web 2.0 • Networks Related Megatrends 2003 0.7 Global Internet users (Bill) 3 2 1 0 CAGR +10% 2015E 2.4 2013E 2.2 2011 1.9 2009 1.6 2007 1.2 2005 0.9 CAGR 2011–2015 8.0% 2.2% 1.2% 9.8% 10.5% 8.4% Asia and Australia Europe North America Latin America ME and Africa Other • New media • Wireless communication Worldwide Internet penetration to reach 36% by 2015 Source: 1. and Graph: EIU Market Indicators and Forecasts (2012), 2. Datamonitor, Global Internet Access (2011); 3. IDC, More Mobile Internet Users Than Wireline Users in the US, September 2011 How big is it really?Description of rise in internet access Tech Trends - Technology
  67. 67. 71 Case studies of disruptive models PC vs. Mainframe motorcycle Cell phones Apple iWatch Bio-engineering Mini-steel mills Mechanical excavators
  68. 68. 72 Capital can be applied to drive efficiency, improvement or disruption Source: Clay Christensen Institute Sustaining innovation: Intel chip processor Disruption: Apple personal computer Efficiency: GE Six Sigma
  69. 69. 74 Bottom-up disruption model. A third type of disruption is driven by external macro drivers Performance Time Macro Drivers • External disruption happens when the rules of the game change and established players no longer meet client requirements Speed of Change • The speed of change increasing shortening the time axes Source: Clay Christensen Institute
  70. 70. 75 Disruptive Innovation Model The disruptive innovation model Figure 1 Time Performance Entrants nearly always win Disruptive innovations Incumbents nearly always win Sustaining • Improve performance of established products • Meet demands of mainstream customers in major markets • Vary in difficulty, cost, time, etc. • Established firms Disruptive • Generally underperform established products in mainstream markets • Have new features that fringe / new customers value • Cheaper, simpler, smaller, more convenient to use • Entrant firms Source: Clay Christensen Institute
  71. 71. 76 New-market innovation model New market innovation Figure 2 Time Time Newperformancemeasure Originalperformance measure New-market disruption Source: Clay Christensen Institute
  72. 72. 77 Universe of Investable Assets – terminology Investments/Money ManagersMoney Holders Intermediaries Money Holders • Individuals, families and organizations which own money • Benefit from its growth or are impacted by its loss • Individuals, sovereign funds, corporations, endowments. Investable Assets – • All financial assets, including real estate / primary home ownership, minus operating capital • Estimated universe of ~$280 trillion as of the end of 2014 Jobs to Be Done • Goals, e.g., returns, inflation protection, transparency, etc • Framework developed by Clay Christensen to look at customer needs by focusing on their fundamental motivation. Intermediaries • Professionals who advise the Money Holders • Either buy direct assets or select Indirect Investments for the Money Holders • Does not include investment bankers • Includes multi-family offices, fund of funds, and private wealth advisors Money Managers • Autonomous individuals and entities which make discretionary investment decisions • Mutual funds, hedge funds, private equity funds, ETFs, risk parity funds, “smart beta” funds ,etc Direct Investments • Purchase of an asset by a Money Holder directly from the original owner, without a Money Manger Indirect Investments • Purchase of a security into a fund or vehicle with a Money Manager making decisions
  73. 73. Domain names Human equity Upstart Litigation Law Finance Patents RPX, Intellectual Ventures Receivables ReceivablesXchange Personal loans LendingClub Virtual Currencies –In-game currency –Frequent flyer miles –Carbon credits CarbonTradeXchange Over time more asset classes become investable.
  74. 74. Examples of Asset Management Innovation (both disruptive and sustaining) Index funds Vanguard Credit default swaps BlueMountain, Saba, Markit Partners Improving and centralizing the back office Addepar* Crowdsourced financing Indiegogo*/ Kiva/ Kickstarter Discount brokerages Charle Schwab Principal-protected products JP Morgan Junk bonds Drexel Burnham Lambert Outsourcing of risk e.g., Blackrock taking transaction risk onto its own books Expert networks GLG; Circle of Experts Research firms that leverage internet data Majestic Research; Navon Partners; Privco web-scraping for private company analytics Quant hedge funds Renaissance Technologies Private company markets Angel List Online wealth management Wealthfront ETFs iShares Theme-specific investing Motif Investing
  75. 75. Disruptive innovation usually follows a few key principles. • Companies depend on customers and investors for resources • Small markets don’t solve the growth needs of large companies • Markets that do not exist cannot be analyzed • An organization’s capabilities define its disabilities • Technology supply may not equal market demand The Innovator’s Dilemma, by Clayton M. Christensen
  76. 76. Disruptive technologies are often not rational investments for incumbents. The Innovator’s Dilemma, by Clayton M. Christensen • Disruptive products are simpler and cheaper, and promise lower margins • Disruptive technologies are first commercialized in emerging or insignificant markets • Most profitable current customers are not interested in the product
  77. 77. 82 Universe of Investable Assets Money Holders Intermediaries Investments/Money Managers Individuals less than $1M ($147T) HNW Individual ($1-30M) ($75T) UNHW ($30M+) ($40T) Gov't / SWF ($5T) Corp ($4T) E&F ($2T) DB Pen- sion ($12T) Insur- ance ($26T) Broker dealers / Financial Advisors ($26T) RIAs ($3T) FoFs ($11T) Investmentconsultants ($38T) Multi-family office ($3.0T) Private banks ($20.3T) Real estate ($80T) Cash and deposits ($67T) Direct Securities (EQ/Bonds) ($47T) Gold ($8T) Traditional Active (EQ/FI/Balanced) ($50T) ETFs ($3T) HF ($3T) PE / VC ($4T) Traditional Passive ($8T) Indirect Robo advisors (<$1T) DC Pen- sion ($22T) Commodities ($1T) 1Includes hedge funds, private equity, real estate, infrastructure, and commodity funds. 2Includes equity specialties (foreign, global, emerging markets, small and mid caps, sectors) and fixed-income specialties (credit, emerging markets, global, high yield, and convertible). 3Includes absolute-return, target dated, global asset-allocation, flexible, income, and volatility funds; liability-driven investments; and multiasset and traditional balanced products. 4Includes active domestic large-cap equity, active government fixed income, money market, and structured products. Sources: BCG GAM Market Sizing 2015; BCG GAM Benchmarking 2015; ICI; Preqin; HFR; Strategic Insight; BlackRock ETP report; IMA; OECD; Towers Watson; P&I; Lipper; BCG analysis.