Investment management industry in asia pacific region

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Investment management industry in asia pacific region

  1. 1. Investment Management Industry in Asia Pacific Region 1
  2. 2. Contents Introduction Market Overview Forces shaping the industry Demographic Trends Regulatory Environment Market Polarization 2
  3. 3. Contents M&A Activity & Key Challenges M&A Outlook Wealth Management Market Sizing Key Trends Overall Industry Outlook 3
  4. 4. Introduction Following the dramatic developments in global financial markets since late 2007, the investment management industry is entering a potentially turbulent period. The tightening of credit markets has created pressure to deleveraging investments and inflation is threatening to become a more prominent feature of the world economy As investment returns fall in numerous mature markets, these developments may in turn lead to greater attention upon Asia Pacific where the longer term outlook is still bright For the purposes of this report, the investment management industry refers to entities that are actively engaged in the management of pooled assets. This includes traditional mutual fund managers and life insurance companies, along with managers using alternative investment strategies through vehicles such as hedge funds The extent of this report extends across the entire Asia Pacific region, including Australasia, South Asia and North East Asia with a particular focus on the most developed economies such as Australia, Hong Kong, Singapore, Taiwan and South Korea, along with the two most significant developing markets in the region – India and China 4
  5. 5. Market Overview Asian Assets by Investment Type An overview of the largest Asia Pacific investment management markets show Japan and Hong Kong rising in terms of the numbers 10% of the numbers of funds and fund managers with Japan and Equities Australia having the highest quantum of assets under management 19% Money Market Australia and Japan are the only markets with significant volumes of Bonds 62% assets are managed by pension funds. Life insurance companies in 9% Others Japan have more assets under management than their counterparts in other countries combined. Equities continue to dominate as the preferred medium for investment Number of Companies, 2007 Assets Under Management (USD bn), 2006* Fund Managers Life Insurance Hedge Funds Fund Managers Life Insurance Hedge Funds Pensions Australia 175 34 66 763 236 31 900 China 58 46 n/a 477 284 n/a 92 Hong Kong 280 44 118 791 23 20 62 India 33 17 14 122 150 3 59 Japan 134 39 270 679 1,800 22 809 Korea 50 22 n/a 286 280 n/a 66 Singapore 109 12 190 581 66 n/a 94 Taiwan 39 30 n/a 111 15 n/a 4 *To allow more direct and consistent country comparison, 2006 AUM numbersSources: Matrix Services Limited., APRA, InvestAustralia/Axiss Australia, Indian Ministry of Finance, Association ofMutual Funds of India, irasia, Hong Kong Securities and Futures Commission, Office of the Commissioner of Insurance, 5Taiwan Central Bank, SITCAT, Financial Supervisory Service (Korea), Monetary Authority of Singapore, Japan
  6. 6. Forces shaping the investment management industry in Asia PacificWith levels of middle class wealth rising, the - Growing wealth and prosperity among the middle classlimited existing penetration of structured ormanaged products in many markets points toopportunities for continued growth - Regulatory reforms opening up previously closed marketsAnother factor affecting the Asia Pacificregion is the increased influence due to global - Market polarization within large, branded fundinvestment trends. managers and niche institutional investment managers like hedge fundsVarying regulations pertaining to this industrypose the biggest hurdle while entering Asia - Difficulty in attracting and retaining key staffPacific markets. These challenges range fromstaff retention to issues related tocommunication and - Asia Pacific region‟s cultural and dialects diversity thattechnology, distribution, etc. has implications for market entry and distribution strategiesAsia Pacific cultural and language diversityhas very real and specific implications.Regional fragmentation is an unavoidablereality within this region 6
  7. 7. Demographic Trends: A market of Vast Potential The region accounts for more than 60 percent of the world‟s 6.5 billion population, but remained underdeveloped in terms of investment management services penetration Many regions worldwide are responding to the challenges of an ageing or greying population and Asia Pacific is no exception. Japan and Korea are expected to witness a fall in their population between 2005 and 2015 1 In case of China, the falling birth rate has been altered with the „one child policy‟, while in other countries it is a product of increased affluence and urbanization. By contrast, two-thirds of India‟s population is under the age of 35, pronouncing it as one of the youngest countries of the world Exhibit I entails the growth in percentage of people over 65 years in six Asian countries. Exhibit clearly illustrates the demographic position confronting some of the large economies. In most countries, the percentage of people aged over 65 will make up vital proportion of the total population by 2025 The significance of this trend, in reference to the development of the investment management industry within Asia Pacific region is that the deteriorating demographic position around the region is helping the growth of governmental programs of pension reform and market liberalization. This should continue to create new pool of funds for the industry to manage 35 Exhibit I: Proportion & Population aged 65+ in % 30 25 20 1975 15 2000 2025 10 5 0 China Hong Kong India Japan Korea Singapore Taiwan1 www.global-dem.comSource: UN Population Department, US Bureau of Census 7
  8. 8. Regulatory Environment: A kick-start for theindustryChanging regulations along with new marketstructures are being put in place to stimulate moreorderly development in capital markets Exhibit 2: Relative Size of Pension Assets (USD billion), 2006Pension Reforms Australia 900Reforms to pension systems have been occurring Japan 809throughout the region, driven by demographic andeconomic trends. Around the region, savings Singapore 94schemes are being implemented to shift pensionprovision from state to individual. Many of these China 92emerging savings are mandatory, with definedcontribution structures such as Central Provident Korea 66Fund in Singapore, the Mandatory Provident FundSchemes in Hong Kong and the New Pension Hong Kong 62System for government employees in India India 59The development of a strong domestic fundmanagement industry has been supported by many Taiwan 4governments in the region as they seek to establish Other 15orderly, liquid domestic capital market 0 100 200 300 400 500 600 700 800 900 1000Exhibit 2 and 3 cites a summary of the keycharacteristics of numerous pension schemesoperating in Asia Pacific along with the total assetsunder management for each schemeSource: Matrix Services Ltd., Allianz Dresdner Economic Research and Individual Country Regulators 8
  9. 9. Regulatory Developments: A kick-start for the industry continues… The oldest and most successful mandatory savings programs in the region is Australia‟s Superannuation Scheme, established in 1992 that necessitate employers to contribute to the employee‟s designated superannuation fund at least ever three months. Today Australian workers have over AUD 1 trillion (USD 900 billion) in superannuation assets.2 Consequently, they now have more money invested in managed funds per capita than any other economy globally The issue in Asia Pacific region, however, is not always of design but rather the level or extent of funding. For illustration: Private Public Social Mandatory Voluntary Scheme Name Individual Assets Under Pensions Security Choice Management Australia Yes Yes Yes Superannuation Yes USD 900 bn China Yes Yes NSSF/Enterprise USD 92 bn Annuity Hong Kong Limited Yes Mandatory Yes USD 62 bn Pension Fund India Limited Yes Yes New Pension Yes USD 59 bn Scheme Japan Yes Yes New Corporate Yes USD 809 bn Pension System Korea Yes Yes New Corporate Yes USD 66 bn Pension System Singapore Yes Central Yes USD 94 bn Provident Fund Taiwan Yes Planned Yes New Labour USD 4 bn Pension Fund2 Australian Prudential Regulatory Authority (APRA) Source: Matrix Services Ltd., Allianz Dresdner Economic Research and Individual Country Regulators 9
  10. 10. Regulatory Developments: A kick-start for the industry continues… The Chinese pension system is well The Japanese system has undergone a designed having three distinct pillars or series of reforms. Automatic changes to elements that are in line with World Bank‟s benefits were introduced for greater recommendations. The first public pillar flexibility and new corporate pension plans entails to a state-sponsored pay-as-you-go came into being. The current system scheme and funded individual accounts. The include the flat rate National Pension second pillar is a voluntary occupational System and employment related pensions pension in the form of enterprise annuities, for public and private employees. whereas the third pillar is based on voluntary use of private savings Exhibit 4 offers a view on current pension scheme of seven key markets within the region along with the estimates of AUM Hong Kong‟s mandatory defined contribution that are likely to grow by 2015 scheme was introduced in 2000. AUM 2006 Forecast AUM in CAGR Additionally, there are legacy voluntary (USD bn) 2015 (USD bn) occupational schemes and a small social China 92 640 24.1% safety net for elderly as well Hong Kong 62 140 9.5% India‟s pension system is fragmented with India 59 230 16.3% very limited or no social security net for the elderly, though there is a well defined Japan 809 890 1.1% benefits pension system for civil servants. Almost 90 percent of India‟s workforce is not Korea 66 310 18.8% eligible for any schemes Singapore 94 150 5.3% South Korea enacted legislation to unify its Taiwan 4 56 34.1% corporate pension system in 2005, having 2 basic distinctive plans, funded and unfunded Exhibit 4: Forecasted growth in Assets Under Management (AUM) Source: Matrix Services Ltd., Allianz Dresdner Economic Research 10
  11. 11. Market Liberalization The ongoing competition of Hong KongAnother regulatory development has been the and Singapore as regional financial hubsopening up of financial markets of foreign capital and in fund management, hedge funds, andinstitutions; and has been a significant positive private wealth management is the mostdevelopment for economies and for Asia Pacific relevant example of this practiceinvestment management industry, in particular, by:creating new opportunities for both Asian andinternational companiesfacilitating exchange of ideas, know-how andknowledge across the regionplacing competitive pressures to improveperformance and effectivenesspromoting the need for better transparency andcorporate governancecreating new capital (international) poolscreating more choice and greater diversifyingopportunities for consumerAnother highly significant trend that is less evident isthe drive to open up markets to foreign participationthrough competitive liberalization, where jurisdictionscompete for foreign investment with tax andregulatory incentives, particularly in East andSoutheast Asia 11
  12. 12. Market Polarization: Room For Growth Though the investment management industry in the region have seen less M&A activity than elsewhere, the industry is moving through polarization process, by moving towards two distinct and opposite approaches. First category is the „bulge bracket‟ players who gain their competitive advantage through economies or scale. While they may seek to develop new products and diversity into new investment strategies, prominent aim remains growth of their assets under management. Here, size plays quite a pivotal role By contrast, there are smaller boutique managers who are more focused around alpha returns. While the concern would still be the same to improve on assets under management, they also charge higher fees and too often a split in profits or performance fee for specialist investment advice. Such companies trade on the name and expertise of specific people Polarization process has numerous implications for investment management industry and related segments that include: - the introduction of new business models such as the funds supermarket concept in Asia Pacific - pressures on mid market players to adapt - support functions like administration and custody have had to review their own strategies - bulge bracket players engaging the services of specialist managers as they adopt a fund of funds approach 12
  13. 13. Hedge fundsThe region is already witnessing growth in asset classes such as private equity, infrastructure, real estate and otherstructured products. However, it is in the hedge fund segment where the industry has seen exponential growthThe number of hedge funds in Asia Pacific region has increased substantially in recent times. Per one estimate, in2007 there were 900 dedicated Asia Pacific hedge funds with USD 200 billion of assets under management,depicting an annual growth rate of 25 percent. These numbers further rose to close to 1,000 in 2008These numbers do suggest that this region now constitutes for slightly more than 10 per cent of total assets undermanagement in the global hedge fund industryPresently, the Asian funds market is characterized by the following: Exhibit 5: Hedge fund strategies in Asia Pacific- the market is now dominated by institutional investors and the global allocators are becoming increasingly important. 9% 5%- the individual hedge funds, on their own, are getting bigger and have 5% Long Short large asset bases. Per an estimate by GFIA, more than 60 per cent of 5% Multi Asian hedge funds have more than USD 50 million of assets under 6% 55% Macro management that has been from 40 per cent in 2003 Fixed Income 15% Relative Value- more and more global funds are establishing a physical presence in Asia CTA due to the ever increasing need to be on the ground to identify Others opportunities. In particular, Hong Kong and Singapore offer a well developed regulatory environment, advantageous tax arrangements, and relatively low barriers to entry Source: Eurekahedge and GFIA- However, there remains a strong presence of funds focusing on this region from locations outside (specifically in the UK and the USA), as exhibit 5 shows- Long-short equity investments continue to dominate the region, with a majority of Asian hedge funds adopting it as a strategy. One fund manager believes that for most markets, including China, it may be too early to talk about the environment for alternative investments 13
  14. 14. Mergers and Acquisitions Activity in Asia Pacific Financial ServicesIntroduction to Asian Financial Services Cross-border transactions gather Looking AheadM&A momentum Despite renewed concerns over theAsian financial services M&A declined in Institutions across Asia see M&A as gloomy global economic2010, but held up well compared to crucial tool in wake of exposure to environment, M&A activity in theother regions. Deal values for the first higher growth with cross-border deals region is believed to be acceleratedtwo quarters of 2011 have risen year- expected to accelerate. More mature through 2011 and into 2012, drivenon-year basis. Per one survey markets such as by a supportive long-term macroconducted by one of the players, in the Australia, Singapore, Japan and environment with a range of strategicmedium to longer term, growth in Asian Korea are being joined by American factors. Some of the specific potentialfinancial services will continue to be and European groups; and coupled areas for deal activity include – Indiandriven by a range of supporting with the ever increasing prospect of asset management and non-bankeconomic and demographic factors that China coming in, this is supportive of finance; trust, life insurance andinclude the rapid emergence of middle- increased cross-border activity across asset management in Greater China;income consumers the entire financial services spectrum Indonesian banking and insurance, Malaysian insurance, Australian assetStrong strategic rationales drive Obstacles and enablers to deal management, and Vietnamesedomestic M&A making bankingDomestic M&A remains the prominent Capital restrictions are emerging asdriver of Asian financial services the leading obstacle to financialtransactions, and is being stimulated by services M&A in the region, witha range of strategic factors that are not Basel III being the source of concernlimited to domestic along with tighter capital regulation incompetition, increasing pressure on many markets will have an effect onoperational and capital efficiency, and the size and shape of M&Aongoing divestments by strategic transactions. Legislative interventioninvestors from outside the region is a potential threat. Difficulties with deal valuation are easing, but remain 14 a crucial obstacle in some markets
  15. 15. Key Findings - Asian financial services deals declined in 2010, but the geographic spread of deals increased - Asian transactions also help up more strongly than in some other regions - The Asian macro-economic environment continues to be highly encouraging. Despite renewed economic concerns in Europe and North America, this is providing support for business and investor confidence - Asian financial services markets are expected to expand exponentially in the medium to long term, supported by demand from the region‟s growing mass affluent consumers, trade flows and investments - Most firms in the region report strong revenue growth and bullish projections for the year ahead From a support perspective the summary of accompanying figures is as follows: Exhibit 1: Summary of 2010 Asian financial services M&A transactions by deal value (US$m) Exhibit 2: Expected level of business growth, next 12 months Exhibit 3: Likelihood of considering or undertaking material M&A during the next 12 months Exhibit 4: Sentiment during the next 12 months, 2008-2011 Exhibit 5: Primary motives for considering M&A during the next 12 months Exhibit 6: Primary drivers of decreasing revenues during the last 12 months Exhibit 7: Areas likely to attract firms utilizing M&A to expand into new lines of business Exhibit 8: Most attractive areas for geographic expansion via M&A Exhibit 9: Likelihood of making a divestment during the next 12 months Exhibit 10: Primary motives for possible divestment during the next 12 months 15
  16. 16. Exhibit 1: Summary of 2010 Asian financial services M&A transactions, by deal value (US$m) Target No. of Deals Banking Securities & Mutual Funds Insurance Others Total (US$m) Country Cap Markets & Asset Mgt China 78 10,823 1,960 2,666 672 613 16,733 Australia 104 258 46 1,654 8,300 185 10,442 Japan 104 1,239 491 67 5,363 1,047 8,207 South Korea 29 4,479 61 28 1,520 426 6,514 Hong Kong 39 1,410 207 327 3,143 366 5,453 India 88 829 254 553 19 399 2,054 Thailand 17 1,122 - 9 - 194 1,326 Malaysia 18 - - 0 911 1 912 Indonesia 51 704 17 4 44 30 799 Taiwan 15 98 429 6 183 - 716 Singapore 16 - 4 228 313 2 547 Pakistan 8 279 - - - - 279 Philippines 8 181 - - - - 181 Kazakhstan 5 131 - - - - 131 Bangladesh 3 55 - - 17 32 104 New Zealand 17 - - 31 2 48 81 Vietnam 23 11 45 3 11 - 69 Uzbekistan 3 17 - - - - 17 Sri Lanka 13 2 3 2 2 - 9 Azerbaijan 2 2 - - - - 2 Total 641 21,640 3,516 5,578 20,498 3,341 54,574 16Source: Thomson Reuters, Industry analysis
  17. 17. Exhibit 2: Expected level of business growth, next 12 months (%) 27High growth: Greater than 10% 37 34 Medium growth: 5-10% 39 29 Low growth: 0-5% 19 10 Negative growth: Less than 0% 5 Source: Industry Analysis, 2011 0 5 10 15 20 25 30 35 40 45 International business Domestic businessExhibit 3: Likelihood of considering or undertaking material M&A during the next 12 months (%) Under consideration 31 Most likely 27 Have not decided 22 Highly unlikely 13No, M&A has been ruled out 7 Other (please specify) 1 Source: Industry Analysis, 2011 0 5 10 15 20 25 30 35 17
  18. 18. Exhibit 4: Sentiment regarding material M&A during the next 12 months, 2008-2011 22 2008 40 0 38 0 2009 58 0 Dont Know 42 Negative 13 2010 8 Neutral 25 54 Positive 1 2011 20 21 58 Source: Industry Analysis, 2011 0 10 20 30 40 50 60 70 Key Findings - Firms are particularly keen to offer a full service - Growing competitive pressures acting as a spur to spectrum to their corporate and high-net –worth domestic consolidation in many Asian financial clients services markets - Pressure to consolidate is particularly strong for - M&A is also seen as an effective way to accelerate small and medium sized firms facing capital and customer acquisition, even in fast growing markets profitability pressures - Cost synergies mean that same-sector mergers - Market specific factors remain highly influential in remain the easiest to sell to shareholders and terms of regulatory attitudes and the role of other regulators government bodies - Large Asian financial groups are increasingly - Deal activity is being supported by non-core targeting a financial conglomerate structure disposals and the increasing interest of non- financial groups in financial services ownership 18
  19. 19. Exhibit 5: Primary motives for considering M&A during the next 12 months (%) Increase market share and business growth 55 Enhance products or customer experience 36 Focus on geographic expansion/footprint 35 Expand into new business lines 28 Respond to board/shareholder directive 10 0 10 20 30 40 50 60 Source: Industry Analysis, 2011Exhibit 6: Primary drivers of decreasing revenues during the last 12 months (%) Competition or falling margins 35 Lower levels of fee income 30 Customer Churn 28 Prior year disposals 11 Proprietary trading losses 7 FX-related losses 2 Other (please specify) 2 0 5 10 15 20 25 30 35 40 Source: Industry Analysis, 2011 19
  20. 20. Exhibit 7: Areas likely to attract firms using M&A to expand into new business lines (%) Investment banking 50Investment management 46 Capital markets 36 Retail banking 32 Corporate banking 32 Life insurance 31 Private banking 30 Reinsurance 20 Private equity 18 Outsourcing provision 18 Non-life insurance 17 Other 1 Source: Industry Analysis, 2011 0 10 20 30 40 50 60 20
  21. 21. Exhibit 8: Most attractive areas for geographic expansion via M&A (%) China 37 Singapore 23 Hong Kong 21 Malaysia 19 Thailand 17 Japan 17 India 16 Australia 14 Taiwan 13 Indonesia 11 South Korea 10 Vietnam 10 Phillippines 9 Other Asia-Pacific 3 Africa or the Middle East 1 North America 1 Latin America 1 Europe0 Source: Industry Analysis, 2011 0 5 10 15 20 25 30 35 40Exhibit 9: Likelihood of making a divestment during the next 12 months Exhibit 10: Primary motive of possible divestments during(%) the next 12 months (%) Under consideration 25 Focus on core business 52 Most likely 22 Free up capital 31 Have not decided 22 Unlock higher shareholders value 25 Dispose of underperforming business 23 Highly unlikely 20 Compliance 18No, has been ruled out 11 Divest to a strategic partner 18 Other (please specify) 1 Respond to board 6 0 10 20 30 40 50 60 0 5 10 15 20 25 30 21
  22. 22. M&A Activity: Key DeterrentsThe idea here is to understand some of Public Sector Intervention Uncertaintythe factors that can act as enablers ingetting transactions a success after Public sector intervention – direct or The more pervasive impact is toexploring some of the motives driving indirect – with an ever increasing create an atmosphere of uncertainty.financial services M&A activity in Asia involvement of governments and the This can take place through a rangePacific region regulators is seen as representing a of factors such as issuance of crucial deterrent to financial services licenses, the speed of regulatoryCapital Restrictions M&A in the region approvals, inconsistent supervision, or perceptions of localMore than two years after financial It occurs when specific deals are bias or political riskmarkets began to rebound, capital blocked that may reflect competitionrestrictions are identified as the concerns Valuation Problems, Pricing Gapslargest single obstacle to M&A in the Regulators, too, have a direct impact and Poor Information Managementindustry, which was followed by alack of attractive targets on this activity by imposing limits on foreign ownership of financial There is an enormous concern about(32%), government or regulatory services companies due to which the bidder competition and priceintervention (30%), and valuation local group gets protected from expectation gaps which wereproblems (27%) predatory takeovers; but as an identified as 22% each as per oneBasel III Requirements enabler, it can also increase the study medium-term logic for M&A byThis has been taken as a particular restricting the inflow of new entrants Lack of attractive targetssource of concern on uncertainty and and expertiseis expected to have a widening and Per one study, 32% rank this problemdirect impact on bidder behavior, by as the second greatest deterrent. Aincreasing demand for a smaller Post-Deal Challenges lack of domestic opportunity scoresdeals at the expense of larger ones. high too and can be considered asPer one survey, this will stimulate Post deal barriers are of high major source of obstaclegreater focus on targets‟ liquidity concern, particularly in terms ofprofiles (35%) and increasing interest human capital. Cultural and peoplein the quality of targets‟ risk challenges can be hard to manage inmanagement controls (28%) any industry completely 22
  23. 23. Exhibit 11: Current Principal Obstacles in Asian M&A (%) Exhibit 12: Expected Effects of Basel III on M&A in Asia (%) Price Expectation Gaps 22 Encourage greater focus on capital efficiency of 51 Capital restrictions 34 transactions Lack of attractive targets 32 Regulatory intervention 30 Increase demand for smaller deals 37 Valuation difficulty or uncertainty 27 Lack of domestic opportunities 25 Greater emphasis on targets liquidity profiles 35 Poor external finance availability 22 Excessive competition 22 Stimulate divestments to release capital 33 Restrictions on equity ownership 20 Poor target information 18 Increase focus on targets risk management 28 framework Weak shareholder value creation 17 Reputational risk 11 Lead to longer due diligence processes 22 EPS dilution 10 Distraction from core activities 10 Other (please specify) 2 Other (please specify) 1 0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 Exhibit 13: Management challenges during and after M&A (%) Culture/People issues 51 Technology integration issues 42Regulatory approval and compliance issues 40 Operational and/or process issues 39 Synergy creation issues 35 Customer retention issues 25 Brand management issues 22 Business strategy issues 21 Other (please specify) 1 0 10 20 30 40 50 60 Source: Industry Analysis, 2011 23
  24. 24. Exhibit 14: If the primary motive for acquisition is to expand into newbusiness lines, which of the following areas might attract theorganization (%)Investment management 71 Private equity 71 Outsourcing provision 57 Capital markets 43 Retail banking 29 Corporate banking 29 Investment banking 29 Private banking 29 Life insurance 29 Non-life insurance 29 Reinsurance 29 Other (please specify)0 Source: Industry Analysis, 2011 0 10 20 30 40 50 60 70 80M&A Activity in Asia Pacific Financial Services: OutlookThe overall outlook for Asian financial On a short term basis, there is anservices M&A is highly encouraging. uncertainty arising out from theKey considerations for this include sovereign debt markets of Europe andpositive demographic trends, increasing the US, which could create additionallevels of domestic consumption and opportunities for mergers andrapid expansion in the numbers of acquisitions in the region. A range ofmass-affluent consumers along with the strategic priorities point to increasingincreasing Eastward shift to the global appetite for deal makingwealth management industry 24
  25. 25. Having a look at the strategic rationale Furthermore, the growth potential of A range of strategic priorities pointfor further growth, there are certain asset management in to increasing appetite for deal-predictions made for India, Greater China, coupled with increasing making in the region going forwardChina and Australia along with the demand for cross-borderpotential areas of opportunity for investment, to stimulate crucialfinancial services transactions asset management M&A activity within Greater China during the next few yearsThe Indian financial services market While private equity firms are stilloffers strong potential for a trigger in viewed with suspicion by regulators inthis activity. The asset management a number of regional markets, theand non-bank financial sectors offer post-crisis phase of economic andclear scope for further consolidation financial recovery in Asia could offerwhere both are open to foreign attractive opportunities for privatebidders seeking exposure to Indian equity investorsgrowth prospects Potential areas for financial services transactionsDespite the maturity of Australianfinancial services, it is expected from Life insurance in Mainland China with Mid-sized Indonesian banks offeringthe country to generate crucial M&A investment opportunities for product attractive investment opportunities toactivity, which entails both outbound development skills of offer routes to strengthen capital ratiodeals by the largest Australian offshore marketsfinancial groups along with increasinginbound investment in fast growingasset management sector City commercial banks in Mainland Asset management and brokerage in China with some opportunities for Taiwan where recent transactions domestic mergers or foreign investors could prompt further round of consolidation 25
  26. 26. Wealth Management: Market SizingGlobal OverviewGlobal private financial wealth grew by 1.9 percent in Globally, the amount of private wealth held in equities2011 to reach a total of $122.8 trillion3 (Exhibit 15). The declined by 3.4 percent, driven by both negative marketrise was considerably weaker than in either 2009 or performance and asset reallocation. Wealth held in2010, when global wealth grew by 9.6 percent and 6.8 bonds grew by 3.3 percent and cash and deposits rosepercent, respectively by 5.2 percentThe evolution of private wealth varied by region in In reference to household segments, the highest growth2011, highlighting how the year‟s economic turbulence rate was in the ultra-high-net-worth (UHNW) segmentaffected the developed and developing worlds. North (households with more than $100 million in wealth) thatAmerica, Europe and Japan lost the private witnessed an increase by 3.6 percent – compared withwealth, while the rapidly developing markets in Asia average growth of 1.7 percent across all otherPacific and Latin America managed to sustain double- segmentsdigit growth they have experienced in recent yearsThe Middle East and Africa continued to grow but at amore moderate rate than in past years, owingparticularly to regional political instability To support this view, the summary of accompanyingOverall, global wealth in private wealth is clearly being figures is as follows:driven by rapidly developing economies and not by thealready developed world (Exhibit 16). In BRIC Exhibit 15: The Growth of Global Wealth Slowed in 2011countries, for instance, where nominal GDP growth was Exhibit 16: “New World” Drove the Modest Growth in15.5 percent on weighted-average basis, wealth Global Wealthincreased by 18.5 percent in 20114Equity markets suffered across most of the world in2011, with positive showings in only a few countries.Europe‟s equity markets were hurt the most, theGreece‟s falling by a staggering 52 percent 26
  27. 27. Exhibit 15: The Growth of Global Wealth Slowed in 2011 Private financial wealth ($tri) 41.5 38.3 38.0 35.6 2009 2010 2011 2016 E 1.7 1.9 2.9 1.4 2.9 1.4 1.7 1.9 36.7 32.2 33.6 33.5 North America 2009 2010 2011 2016 E 2009 2010 2011 2016 E Eastern Europe 2009 2010 2011 2016 E Japan Western Europe 6.1 3.9 4.3 4.5 2009 2010 2011 2016 E 40.1 5.4 2.9 3.2 3.5 19.0 21.4 23.7 Middle East and Africa 151.2 112.9 120.6 122.8 2009 2010 2011 2016 E 2009 2010 2011 2016 E Latin America Asia Pacific (ex Japan) 2009 2010 2011 2016 E Global Source: BCG Analysis Note: Private financial wealth numbers for all years were converted to US$ at year-end 2011 exchange rates to exclude the effects of currency fluctuations. Percent changes and global totals are based on complete numbers. Calculations for 2009 and 27 2010 are based on the same methodology
  28. 28. Exhibit 16: “New World” Drove the Modest Growth in Global Wealth Drivers Growth in 2011 GDP growth +3.2% f Newly created wealth1 Savings rate 4.7% “Old World” -0.9% • North America • Western Europe f • Japan Equity performance -12.2% Existing assets2 f Savings rate -1.6% Equity performance ~0% Global private + financial wealth GDP growth +11.3% +1.9% Newly created wealth1 f Savings rate 5.1% “New World” +10.0% • Asia Pacific (ex Japan) • Eastern Europe f • Latin America Equity performance -11.7% • Middle East and Africa Existing assets2 f Savings rate -0.7% ~0%Note: All growth rates are nominal, including GDP growth rates. Performance averages are unweighted Equity performanceand reflect domestic market development3 New private financial wealth, generated primarily through income 284 Growth in asset value Source: BCG Analysis
  29. 29. Private wealth is expected to post a compound annual growth rate of 4 to 5 percent over the next five yearsto reach more than $150 trillion by the end of 2016. As per one estimation, equities will be the fastestgrowing asset class, with a projected CAGR of 4.9 percent. By end 2016, the share of global wealth held inequities should be 34.0 percent of the total, still below the precise share of 38.5 percentAdditionally, over the next 5 years, the amount of wealth held by all clients with more than $1 million inwealth should show a CAGR of around 6 percent, driven prominently by an increasing number ofhouseholds in this segment in Asia Pacific. Average wealth of such households is expected to increase justmarginally; however, this segment will continue to grow the fastest over the next five years, by a projectedCAGR of 8 percentRegional Variation The growth of private wealth varied widely across all regions in 2011North America5 Western Europe6Private wealth in North America declined by a Though the region didn‟t suffer as much as0.9 percent in 2011 to $38 trillion. Overall, the North America, the euro debt crisis took itsamount of wealth in equities and bonds toll, and private wealth declined by 0.4decreased by 3.6 percent and 2.1 percent to $33.5 trillion, due to which thepercent, respectively. The share held in cash region remained as the second wealthiestand deposits grew by 3.5 percent worldwideA near default on U.S. government Equities lost a 2.1 percent pointdebt, combined with the euro debt share, constituting 28.5 percent of thecrisis, made 2011 an unpleasant year for the region‟s financial wealth at the end of 2011US economy. All this, along with thedowngrade of the nation‟s credit rating has Extreme levels of both government andled to significant investor uncertainty. North private debt, including the threat ofAmerican wealth is projected to post a CAGR bankruptcy faced by numerous Europeanof 1.8 percent over the next five years to Union countries, led to double-digit stockreach $41.5 trillion by the end of 2016 market declines in some of the region‟s largest economies 29
  30. 30. Offshore wealth declined by 2.2 percent CAGR of 11.1 percent, touching $40.1 trillionthereby reducing the share of total private by the end of 2016, at which time it will havewealth to 7.6 percent. Per an estimate, it is slightly overtaken Western and Easternprojected to show a CAGR of 1.8 percent to Europe (combined). These gains should bereach $36.7 trillion by the end of driven largely by sustained strong GDP2016, primarily driven by moderate equity- growth in China and India and overallmarket recoveries in the largest economies stronger stock market performanceAsia Pacific (ex Japan)7 JapanPrivate wealth in Asia Pacific (ex Japan) Private wealth in Japan decreased by 2.0increased by 10.7 percent in 2011 to $23.7 percent in 2011 to $17.8 trillion. The value oftrillion, enabling the region to widen its gap wealth held in equities fell by 7.6with Japan as the third wealthiest area percent, while amounts held in bonds andglobally. The strongest growth was in the cash along with deposits remained flathigher wealth bands, with the share of totalwealth increased to 48 percent Drivers of the overall decline included the lingering effects of March 2011 tsunami andThe amount of wealth in equities grew by 4.1 earthquake – and the subsequent Fukushimapercent, a weaker performance than the nuclear plant – along with poor stock marketannual growth of 17.7 percent witnessed over performance. Per one estimate, privatethe previous five years. Wealth held in bonds wealth is projected to post a CAGR of 0.8rose sharply by 17.5 percent, and cash and percent to reach $18.5 trillion by the end ofdeposits increased by 13.4 percent 2016Despite poor stock market performance in Eastern Europe8several large countries, notably Indian andChina, strong GDP growth driven primarily by Russia, with GDP growth well abovehigh levels of government and private that of most mature economies, was theconsumption led to new wealth generation. primary driver of the 2011 increase inWealth in the region is expected to continue Easter European wealth that rose bygrowing at a double-digit rate with a projected 14.4 percent to $1.9 trillion 30
  31. 31. Eastern European wealth is forecast to grow largely as a consequence of continued GDPway faster than Western European wealth – expansion in oil-rich countriesat a CAGR of about 8.7 percent over the nextfive years, reaching $2.9 trillion by the end of Latin America102016, with the bulk ($2.0 trillion) held inRussia The region‟s private wealth grew by 10.6 percent in 2011 to $3.5 trillion, drivenThese gains will be driven primarily by the primarily by strong GDP growth in Brazil andregion‟s status as the world‟s largest oil Mexico. Also, the region‟s stock markets wereproducer and its continuing GDP momentum less affected by global economic uncertainty than those in many other economies, withMiddle East and Africa9 regional wealth held in equities rising by 2.8 percentThis region‟s stock markets suffered from thepolitical instability due to the uprisings across Wealth held in bonds soared by 16.6the Arab world in 2011. Still, the region percent, and cash and deposits rose by 9.2managed to improved upon its private wealth percentgrowth by 4.7 percent to $4.5 trillion, primarilydriven by high savings rate and strong Private wealth in the region is project to postdouble-digit GDP growth in oil-rich countries a CAGR of 8.9 percent over the next five years to touch $5.4 trillion by the end of 2016.Though the amount of wealth held in equities This will be in wake of the onshore offeringsdecreased by 2.6 percent, the amount held in that are becoming more sophisticated asbonds rose by 13.3 percent and cash and international players enter the market Notes:deposits grew by 5.1 percent GDP data are from Economist Intelligence Unit (EIU) This looks at three asset classes: equities, bonds, and cash and deposits 5. United States and CanadaWealth in the UHNW household segment 6.grew exponentially, posting 9.0 percent driven Germany, France, UK, Ireland, Italy, Spain, Portugal, Switzerland, Austria, Netherlands, Belgi um, Norway, Sweden, Finland, Denmark, and Greeceby the government programs benefiting large 7. Taiwan, China, Australia, South Korea, Hongfamily conglomerates. Private wealth in the Kong, India, Singapore, Indonesia, Thailand, Malaysia, New Zealand, Philippines, and Pakistanregion is project to show a CAGR of 6.6 8. Russia, Poland, Czech Republic, Hungary, and Slovakiapercent to reach $6.1 trillion in 2016, 9. Saudi Arabia, UAE, Israel, Turkey, South 31 Africa, Kuwait, Iran, Egypt, Algeria, Qatar, Oman, Morocco, Lebanon, Bahrain, Tunisia, Syria, Yemen, and Jordan 10. Mexico, Brazil, Venezuela, Colombia, Argentina, Chile, Peru, and Uruguay
  32. 32. Trends Shaping The IndustryThe landscape in this industry will change The economics of wealth managers willfundamentally over the next ten years as continue to be strained. Growth will becompetitive dynamics, regulatory constrained due to tighteroversight, client behavior, and technology regulations, stricter compliancecontinue to evolve. A broad set of trends is requirements, and greater interest inalready in place nonfinancial investments Revenue margins will be compressed byEmerging markets will fuel the growth of stronger competition through disruptiveglobal wealth. In India and China, private business models, increased productwealth is projected to increase at a CAGR commoditization, limited tradingof 19 percent and 15 percent, respectively activity, and a slow recovery of demandfrom the year end 2011 through 2016 – for complex productssignificantly faster than the global forecastof about 4 to 5 percent annually. Margins will also be affected by risingChina, alone will account for 35 costs, new infrastructurepercent, while India will account for 10 requirements, and the scarcity of toppercent in global wealth talentThis is likely to foster the development of More broadly, wealth managers shouldonshore investment opportunities and continue to protect their revenue streamsnew wealth management sectors by working on high value and higher margin solutionsEmerging markets are still very diverse interms of their nature, size and maturitylevels. Few, such as Brazil are already Clients will become more sophisticatedcharacterized by clear and transparent and more self-directed regarding plainregulation, highly developed capital products and services. It is expected thatmarkets, and keen private banking clients from HNW and UHNW to increasingly use alternative channels to execute simple transactions 32
  33. 33. All client segments will become more Products will become simpler and morediscerning, demanding tailored advice and modular. More flexible, transparent, andsolutions based on a comprehensive view of modular products will gain prominence astheir financial needs. Wealth managers must investors seek simple solutions tostrengthen their capacity to provide highly increasingly sophisticated problemscustomized solutions, permitting a more cost-efficient service model Multichannel capabilities and social-mediaPricing will become more transparent and presence should be developed further.closely linked to service models. In Though online wealth managers andresponse to regulatory changes and also community banks will not be majorto changes in client behavior, wealth competitors in the foreseeable future, themanagers must continue to makes trend toward online services, increasedprices, fees, and commissions more channel integration, and greater use oftransparent. They also need to create a social media will have an impact –sharp distinction within high-and-low-cost creating more transparencyofferings Advanced technology and infrastructurePricing, in general, will become a pivotal become more essential. Wealth managerslevel for improving and bolstering client must enhance their IT capabilities in orderacquisition and retention to keep up with client expectations. In order to provide a consistent andRisk management capabilities are critical. seamless experience across multipleHaving tighter regulations and a higher channels, they will need a fully integratedprofile in the mainstream media, players technology platform that has modularmust reinvigorate risk management. applications. To offer tailoredStricter internal guidelines often lead to products, they will have to have a moretime-consuming processes and higher modular product architecturecosts. Overall, the right acts in referenceto risk management must be strongly A break up of the value chain isembedded – bringing value to the client expected, leading to an increase inwhile also protecting from operational and outsourcing to third parties for IT andreputational risk operations 33
  34. 34. Outlook The investment management industry in Asia Pacific has been through an extraordinary period of change and growth in recent years. There remain some significant short-term challenges to the industry, including management of performance in volatile markets, the on-going battle for talent and the fragmented nature of the Asian marketplace. However, the long-term prospects for the industry remain bright, particularly as investment managers continue to exploit the shift in economic activity towards the region The asset management industry continues to be highly attractive compared to other financial services sectors. However, in an era of elusive growth and deepened profitability, strategic decisions concerning where and how to compete have never been more crucial. Overall, the environment will be tougher, with few players enjoying the growth rates and profitability Wealth managers will still need to continue their cost-cutting and pricing initiatives, refocus on client discovery, master the ever-shifting regulatory environment, bolster risk management, and find ways to use alternative business models to their advantage. Only those wealth managers that take action, as opposed to wait-and-watch attitude, will be in a position to thrive regardless of which direction the markets ultimately take 34

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