KPMG has published a new report this week entitled "Growing in a Turbulent World – Finding the next growth engine in APAC asset management."
Asia-Pacific remains an attractive region for global asset managers, with the potential for further growth, according to a new report by KPMG.
"The growth of assets under management (AuM) in APAC was higher than other regions in the 10 years to 2022,” Chee Hoong Tong, partner, Asset Management, KPMG China, said in a statement.
“At the same time, a relatively small proportion of investable assets is currently being managed by asset managers, so there is still potential for further development of the industry,” he added.
Total AuM in the asset management market in APAC reached $27.2 trillion in 2022, showing positive growth despite turbulent market conditions. The region also saw the highest 10-year compound annual growth rate (CAGR) of 14 per cent from 2011 to 2022, outpacing the global average of 9 per cent, the report shows. The rapid growth in net flows in the region has largely been driven by economic growth, wealth creation and regulatory reforms.
One of the benefits for asset managers in APAC is higher and relatively stable margins. Despite higher cost margins – attributed to high regulatory set-up fees and investment in digital distribution – APAC profitability has consistently outpaced North America, the firm added.
Institutional and retail investment
The APAC region has a balanced mix of institutional and retail investment, with variations across different markets, and there is potential for growth in both segments. For retail, the emerging middle class is the core growth engine. Total wealth in APAC reached $177.8 trillion in 2022, making up 39.2 per cent of global wealth. This has largely been caused by growth in the affluent and mass-affluent segments, the firm said. Growth of the middle and upper classes in APAC is creating opportunities for asset managers to capitalise on the growing wealth within the region. Growth in digital transformation and the development of new digital platforms has also enabled retail investors to gain access to a wider variety of product offerings.
In the meanwhile, institutional growth is being driven by insurance and defined contribution pensions. In Japan, institutional investment through pension funds remains the largest contributor to market AuM. Japan’s Government Pension Investment Fund contributes roughly 40 per cent of total AuM at $1.5 trillion. Chinese mainland is the largest market in terms of AuM, the firm continued. A balanced mix of retail and institutional investors with mutual funds being the most dominant product (37.2 per cent of total AuM as of 2021). Growth in retail contributions in the last few years has been supported by China’s strengthening economy until 2021, but more challenging in the last two years, KPMG added. Long-term prospects remain sound, especially relative to mature markets in the West, but the short-to-medium term outlook is uncertain, the firm said.
Swiss private bank Julius Baer also maintains its view that the Chinese economy is not yet out of the doldrums: “The persisting issues in the housing sector, low consumer and business confidence, as well as soft global demand for Chinese exports could lead to moderating growth in the fourth quarter of 2023 after a strong third quarter.”
Alternatives on the rise
KPMG’s report shows that insurers plan to increase allocations in alternatives amid turbulent market conditions. APAC insurers anticipate growth in insurance premium income, but are faced with having tok generate returns in a difficult market environment, the firm added.
APAC equity and bond performance declined -19.7 per cent and -4.4 per cent respectively in 2022. Insurers have indicated that they plan to significantly increase allocations to private equity and private debt as a way of reducing risk and increasimg returns. Insurers in the region predominately manage assets in-house or outsource to intra-group subsidiaries. There are relatively few cases of insurers outsourcing to external asset managers, the firm said.
Defined contribution pensions are also common with growth in alternative allocation, KPMG continued. APAC pensions saw higher growth than the global average in the five years to 2022 (around 8 per cent vs 6.5 per cent respectively), driven by ageing populations and growing workforce contributions. Defined contribution pensions dominate in the majority of markets in the region. The average outsourcing rates for APAC pensions increased from 30.6 per cent in 2017 to 36.8 per cent in 2021, with increasing allocations in alternatives (0.8 per cent increase in alternatives from 2021 to 2022).
Retail distribution meanwhile remains mostly in the hands of large intermediaries, the firm said. Fund products in Hong Kong (SAR), Singapore and the Chinese mainland are largely distributed through banks. Across these markets, banks enjoy high penetration rates, strong existing presence, and have established retail distribution networks. Banks have also leveraged digital channels to deliver comprehensive services, enabling access to a broader market of retail investors. Wealth platforms exploring a new business model could be a disruptor in this space, KPMG said.
For global firms, opportunities lie in “future giants” and smaller emerging markets, the firm added. APAC asset management is a “winner-take-all” market, where the majority of AuM is captured by a small number of players. Top 10 asset managers include BlackRock, Vanguard, UBS Asset Management, Fidelity, State Street Global Advisors and Goldman Sachs Asset Management. Mergers and acquisitions could also help global managers to tap into the market potential, KPMG said.