An overview of the Asset Management Industry
The asset management industry has seen significant growth in recent years with total assets under management (AUM) expected to increase from about £69.2 trillion in 2016 to £104 trillion by 2025. Within the UK, total asset under management is estimated at £8 trillion, accounting for over 35% of European AUM and constituting the second largest market in the world, after the US. Notwithstanding the negative effect of the pandemic on the global economy, the industry sustained less damage and is poised for further growth, driven by a number of factors.
On this page, we provide an overview of the industry, identifying key trends that are likely to play increasing role in the coming years.
Why asset management?
The asset management industry plays a crucial role in the global economy by serving as the middleman that connects surplus capital with productive use cases. By playing the role of capital allocator, the industry promotes productivity in the economy and fosters liquidity and efficiency in the capital markets.
Beyond its macro-level role, the asset management industry ensures asset appreciation and risk mitigation (or control) for investors. Asset managers, who apply multiple strategies and risk control measures, ensure consistent growth in the wealth of investors (individuals and institutions). Through these pooled investments, the asset management industry grants access to varied investment instruments that individual investors might otherwise lack access to. And the client base is expected to increase. Factors favouring increased investment inflows include the rise of wealth in the Asia-Pacific region as well as the pivotal shift to defined contribution pension plans which requires increased investment returns.
Depending on the strategy employed, asset managers undertake in-depth analysis of trends, including macro and micro. At the macro level, managers try to understand key metrics including economic growth rate, inflation, unemployment, and political stability among others. At the micro level, managers study current (and potential) factors affecting select industries as well as firms within the industries. Following this analysis, asset managers choose various investment vehicles in constructing their portfolio. Among these are equity, bonds, commodities, currencies and alternate investments such as real estate, cryptocurrencies and more.
Asset managers usually charge fees instead of commissions (as is common with brokerage houses). These fees are structured in different ways depending on the nature of the fund, the risk profile of investments and concerns over alignment of interests between the manager and investors. The common fee structures include percentage of asset under management and management fee plus performance fee. The latter is common among hedge funds, private equity funds and other active managers for whom high performance is a major goal.
Key Trends in the Asset Management Industry
The recent pandemic spurred changes in the asset management industry that had long been underway and are expected to become increasingly important in the near future. One of these changes is the increasing role of technology in the industry. The PwC lists Machine Learning, Artificial Intelligence and Robotic Process Automation among factors that could affect the asset management industry in the near future. These technologies could potentially impact investment research, portfolio selection and back/middle office roles. Furthermore, with increasing concerns about transparency and compliance as well as the rise of remote work, the role of technology is expected to increase.
Beyond technology, ESG (environmental, social and governance) investing has increased rapidly especially following the pandemic. Key non-financial factors are increasingly considered by asset managers (and their investors) when making investment decisions. Deloitte reports that the trend in ESG investing is likely to increase in the coming years, driven by investor interest, increased regulation and clearer measurement metrics by various international organizations. It is reported that over £21 trillion currently sits in sustainable investment funds worldwide. This is expected to increase to over £36 trillion in the next two decades.
Finally, the rise of cryptocurrencies and the underlying blockchain technology is hard to ignore. From a niche speculative instrument a few years ago, bitcoin (and other cryptocurrencies) has risen in value by almost 9,000% between January 2016 and July 2021. Beyond serving as investment vehicles, these financial instruments have enjoyed increased use cases in various sectors, including insurance, cross-border trade and low-cost payment among others. As the cryptocurrency market matures and finds increased application globally, asset managers will need to reconsider their strategy and incorporate these new digital financial instruments into their portfolio.
We at Reign Capital are already at the forefront of harnessing the potential of the cryptocurrency market and other asset classes with a view to ensure consistent returns for our partners. You can learn more about our investment approach here.