CACEIS NEWS 38 EN

2 caceis news - No. 38 - June 2014

Uncovering the factors set to increase Asset Management’s weight in the financial sector The asset management industry has the opportunity to emerge from the shadow of the banking and insurance sectors and play a more central role in the future of the financial services industry.

New regulations provoke bank deleveraging Annual percentage change in assets and loans of Euro area

Pension funds are set to increase massively over the next 10 years as long-term capital is allocated to pension portfolios. Indeed, pension fund AuM are estimated to reach some $56tr globally within the next five years, with most growth com- ing from Latin American markets, but the largest pools of assets still in North American ($30tr) and Europe ($14tr). Another area in the scope of Long Term Investors is Sovereign Wealth Funds (SWFs), which have seen considerable growth since 2000, with 53 new funds formed and a total segmentAuM of almost $9tr globally. 45% of these assets are entrusted to external parties, traditionally western investment banks, but there remains enormous potential for the asset man- agement sector to claim a share of the business, and our report lays out its recommendations for asset managers looking to win business from long- term institutional players like SWFs and pension funds. ENTERING THE DIGITAL ERA The final section of the report looks at technology and the undeniable effects it has on asset managers’ business in terms of data processing and client interactions. Big Data, an industry buzzword for some time now, is already a major influence on asset management’s fu- ture path. The amount of data not only imported by the asset manage- ment industry, (market and exchange rate data etc.) but also generated by the industry (NAVs, client holdings etc.) can be overwhelming. However, if companies can harness this data, it can be used to improve their invest- ment strategy and better target client sales, and will be essential to a com- pany’s economic survival. Other technology companies, such as Google, have already mastered Big Data analytics, and as per our report’s example in China, tech gi- ants are keen to disrupt the market with new solutions for their user base. With an increasing number of “connected” individuals and devices, the younger generation’s reticence to engage with “old finance” but facil- ity with social media, Asset manag- ers also have a new, direct commu- nication channel through which they can engage with their investors. Our recommendations for the asset man- agement industry as regards Big Data and Social Media are clearly estab- lished in the report. The challenges asset management faces in the coming years are undeni- able - from the regulatory through to the technological - yet the opportuni- ties for the industry to grow in impor- tance and size are substantial. Our re- port clearly analyses these challenges and opportunities, and provides a set of practical recommendations for the asset management industry to move into the spotlight "

YoY change YoY change

Loan an

Asset et

15.0% 16.0

10.0% 10.0

5.0% 5.0

0.0% 0.0

-5.0% -5

-10.0% -10.0

2011 20

2007 07

2008 2009 2010 0 8 2 9 0

2012 2013 2 2 2 3

Source: PWC analysis based on ECB database

ARIANNA ARZENI, Head of Group Business Development Support, CACEIS

T he financial landscape looks different than it did ten years ago, when banks ruled the market and a few that were “too big to fail” tipped the global economy into a long period of recession. Since the crisis, regulators have brought in a wave of regulation to protect the economy and the end investor; inter- net has continued to deepen its inte- gration with our lives, with people increasingly using it to source their fi- nancial information and look for new non-banking investment vehicles; and finally, the progression of the de- veloped world’s demographic trends sees an ever-larger, wealthier, aging population. These major regulatory, technological and demographic forc- es will play a central role in defining and reshaping the global asset man- agement industry’s future, providing significant opportunities for growth. demographic forces will play a central role in defining and reshaping the global asset management industry’s future, providing significant opportunities for growth. FINANCING THE ECONOMY The first area analysed by our report is amacro-economic issue – financing through loans to Small and Medium Enterprises (SMEs). Since the crisis, which itself triggered a massive but temporary shortfall in the loan capi- tal available to SMEs, the regulatory backlash that was designed to protect investors and reduce systemic risk from banks, the traditional lending source for SMEs, has obliged banks to maintain higher capital ratios and “de-risk” their balance sheets. This These major regulatory, technological and

2010 Old-age dependency ratios for different world regions 2010 to 2050 as % *Population aged 65 and older to population aged 15 to 64 2010 2050 2050

in turn has led to a reduction in cor- porate lending. With well-meaning bank regulation creating a funding gap for a part of the economy which is key to restoring growth and reduc- ing unemployment, there is clearly a need for alternative capital sources. Here, the first new asset management opportunities is identified – funding SME loans. Another important area of opportu- nity for asset management outlined in the report is infrastructure invest- ment. Traditionally, it is the domain of national governments, however, with national economies of many nations either still in recession or barely posting positive growth fig- ures, governments have had to ei- ther implement full-blown austerity measures or at least tighten their belts significantly. Belt tightening often impacts infrastructure development due to the high cost of public infra- structure projects and its lower per- ceived importance when compared to other budget areas. Public Private Partnerships (PPPs), in which private capital is added to public funds, are identified in the report as a large and potentially profitable investment op- portunity for the asset management industry. Recommendations for get- ting involved with both SME loans and PPPs are included in the report. The demographic trends that give de- veloped countries top heavy popula- tions are putting unsustainable strain on state pension plans. Self-funded pensions and indeed Self Invested Personal Pensions (SIPPs) look to be an unavoidable path for those seri- ous about planning their retirement. $2 trillion is needed each year to fund infrastructure worldwide MOBILISING LONG-TERM INVESTORS

60

50 50

40

30 30

20

10

0

Western Europe West rn Europe

Europe Northern America Eur e N rt ern America

Eastern Europe East rn Europe

Oceania Latin America + the Caribbean Oce ia Latin erica + the Caribbean

Asia sia

Africa frica

*Populationaged65andolder topopulationaged15 to64

Sources:UNPopulationDivision (2012),AllianzAssetManagement Sources: UN Population Division (2012), Allianz Asset Management

The US and Europe will still have the largest pension fund assets in 2020 Pension fund assets in usd trillion = CAGR 70

50 60 40 20 10 30

56.5

1.1

5.0

6.6%

6.5 13.8

8.8% 9.9% 9.5% 6.2% 5.7%

2.9%

33.9

0.6

8.5 3.2 2.4

29.4

11.3%

0.4 1.5

7.1 2.1

21.3

0.8 0.2

4.7 1.3

30.1

19.3

18.3

14.3

0

2004 2

2007 07

2012 2 2

2020 0

North America orth America Latin America Latin America

Europe Europe

Asia-Pacific

Middle East and Africa Middle East and Africa

Sources:PwC,MarketResearchCentre,AssetManagement2020–ABraveNewWorld. Sources: PwC, Market Research Centre, "Asset Management 2020", 2014

60% The impact on the Digital Era Asset Managers' use of social media

50% 60

2010

2014 study

40%

30%

20% 20

10%

0% 0%

The leading asset management social media to their advantage rms are using The leading asset management firms are using social media to their advantage

Asset management rms are not yet Asset management firms are not yet seeing the value of social media seeing the value of social media

Asset management to explore social media rms are smart Asset management firms are smart to explore social media

Social media is a wise use of asset management Social media is a wise use of asset management firm's time and resources resources rms' time and

Sources: American Century Investments - Fifth Annual Financial Professionals Social Media Adoption Study, 2014 Sources:AmericanCentury Investments -FifthAnnualFinancialProfessionalsSocialMediaAdoptionStudy,2014