With an overview of the conditions that the global asset management industry will face over the medium term, PwC examines the impact on the leading offshore fund domicile.
With significant implications for the Cayman investment fund sector, research from PwC predicts that global assets under management (AuM) will rise to around US$101.7 trillion by 2020, from a 2012 total of US$63.9 trillion. This represents a compound annual growth rate of nearly 6%.
The report, Asset Management 2020: A brave new world, finds that assets under management in the SAAAME (South America, Asia, Africa, Middle East) economies are set to grow faster than in the developed world in the years leading up to 2020, creating new pools of assets that can potentially be tapped by the asset management industry. However, the majority of assets will still be concentrated in the US and Europe.
The report also predicts that alongside rising assets, there will be rising costs. The costs of responding to and complying with regulation will remain high. Fees will be under continued pressure amid the ongoing push for greater transparency and comparability from investors and policymakers. Investment in technology and data management will need to be increased in most cases to maximise distribution opportunities and to cope with regulation and reporting. In addition, full transparency over investment activity and products will exist at all levels, resulting in there being nowhere for noncompliant managers to hide as regulatory and tax reciprocal rights extend across the globe.
Asset managers will need to respond
PwC has identified six game changers that asset managers will have to analyse and address in order to capitalise on the opportunities this changing landscape presents:
- Asset management moves centre stage: Asset management has long been in the shadows of its cousins in the banking and insurance industries. By 2020, it will have emerged definitively from their shadows.
- Distribution is redrawn – regional and global platforms dominate: By 2020, four distinct regional fund distribution blocks will have formed which will allow products to be sold pan-regionally. These are: North Asia, South Asia, Latin America and Europe. As these blocks form and strengthen, they will develop regulatory and trade linkages with each other, which will transform the way that asset managers view distribution channels.
- Fee models are transformed: By 2020, virtually all major territories with distribution networks will have introduced regulation to better align interests for the end-customer, and most will be through some form of prohibition on having the asset manager allocate to distributors as evidenced in the UK's Retail Distribution Review (RDR) and the Markets in Financial Instruments Directive II (MiFID II). This will increase the pressures of transparency on asset managers and will have a substantial impact on the cost structure of the industry.
- Alternatives become more mainstream, passives are core and ETFs proliferate: Traditional active management will continue to be the core of the industry as the rising tide of assets lifts all strategies and styles of management. But traditional active management will grow at a less rapid pace than passive and alternative strategies, and the overall proportion of actively managed traditional AuM will shrink. PwC estimates that alternative assets will grow by some 9.3% a year between now and 2020, to reach US$13 trillion.
- A new breed of global managers: 2020 will see the emergence of global managers, with highly streamlined platforms, targeted solutions for the customer and a stronger and more trusted brand. These managers will not only emerge from the traditional fund complexes, but from among the ranks of large alternative firms, too.
- Asset management enters the 21st century: Asset management operates within a relatively low-tech infrastructure. By 2020, technology will have become mission critical to drive customer engagement, data mining for information on clients and potential clients, operational efficiency and regulatory and tax reporting. At the same time, cyber risk will have become one of the key risks for the industry, ranking alongside operational, market and performance risk.
PwC survey finds 88% of Asset Management CEOs are confident of revenue growth in 2015
More recently, PwC's 18th Annual Global Survey of more than 1,300 CEOs, which includes responses from 155 Asset Management CEOs in 46 countries, found that Asset Management CEOs are also confident about revenue growth. A high of 88% are either 'very' or 'somewhat' confident about their revenue growth, rising to 95% over the next three years. China and the US are viewed as the most important countries for growth prospects.
However, with fees under pressure from the rise of ETFs and passive funds, asset management CEOs remain vigilant on costs, with almost half (46%) aiming to cut costs in 2015 and 28% looking to outsource.
More than a quarter of asset managers reported entering a new segment of the industry over the past three years. A further 18% say they have looked into doing so. Indeed, PwC has seen asset managers disrupt banking by, for example, acquiring portfolios of real estate loans and lending to corporates. Alternative asset managers have broadened their product ranges to include private lending arrangements, primary securitisations and off balance sheet financing.
Asset Management CEOs see their future competitors coming from technology, financial services or business services. Already 'robo adviser' business models are appearing to threaten to disrupt wealth management activities through automating asset allocation.
From a business perspective, 68% of asset management CEOs are concerned about the availability of key skills whilst 63% fear mounting cyber threats, such as data security, which have become an ongoing business risk. What is more, even seven years on from the financial crisis, lack of thrust in business remains a concern according to 61%.
On the regulatory front, asset management CEO anxiety about tax issues is a constant theme. 67% in PwC's survey state an internationally competitive and efficient tax system should be a government priority in their country, although half see government as having failed to achieve this. However, they do see some benefits from regulation with 53% saying improved regulatory coordination is increasing crossborder capital flows.
What does this mean for the Cayman Islands?
From a Cayman perspective this predicted growth is certainly positive news. Home to the majority of the world's offshore alternative fund products, including hedge and private equity funds, Cayman will without a doubt continue to fulfil a crucial role in the industry.
With regard to alternatives in particular, which is especially relevant from a Cayman perspective, alternatives will become more mainstream. As noted earlier, alternative assets are predicted to grow by some 9.3% a year between now and 2020, to reach US$13 trillion. It should also be noted that the majority of assets will still continue to come from the US and Europe – which are the traditional stronghold markets within which Cayman funds are distributed and from which they are managed. Such growth is predicted within the environment of a maturing alternatives industry, which will also experience the rise of the so so-called 'mega manager'. In other words, growth in alternatives AuM does not necessarily indicate a proportional increase in the number of managers or funds coming to market. The Cayman industry and all of its participants need to be cognisant of this dynamic.
The PwC research confirms that regulatory and tax reciprocal agreements will continue to expand across the globe. It can therefore be expected that the Cayman Islands Monetary Authority (CIMA) will continue to negotiate and refine its regulatory and tax cooperation agreements with its global regulatory counterparts. Furthermore, arrangements similar to the Cayman Islands Governments (CIG) recent Model 1B Intergovernmental Agreement reached with the US pursuant to the US Foreign Account Tax Compliance Act (FATCA) are planned to be expanded to multiple jurisdictions.
Cayman will continue to stay at the forefront of such regulatory and tax transparency initiatives, thanks in part to a constructive and consultation based relationship that exists between CIMA, CIG and the private sector. Other recent developments in this regard have included bringing master funds into the scope of the mutual funds law and the recent registration and licensing regime for directors to certain Cayman registered funds. All of these are examples of appropriate responses to the international regulatory agenda.
Considering these growth prospects, for the Alternatives sector in particular, there will be significant opportunity, and the influence and reach that Cayman has as a relevant player in the financial services industry will continue to be significant.
To download a copy of Asset Management 2020, please visit www.pwc.com/assetmanagement PwC's report 'Redefining competition in a world without boundaries: Asset Management Summary', is based on the response from 155 asset management CEOs in 46 countries. To see the full results of PwC's 18th Annual Global Survey, please visit www.pwc.com/ceosurvey
About the Author
Graeme Sunley is a Partner as well as the Asset Management and Territory Leader of PwC Cayman Islands. He has nearly 20 years of professional experience and specialises in Alternative Investment Fund products with a variety of strategies and legal structures. Graeme is a Past President of the Cayman Islands Society of Professional Accountants and former member of the Executive Committee of the Cayman Chapter of AIMA.
Originally published in Cayman Finance Magazine, 2015-2016, Issue 2
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