Asset And Wealth Management Revolution: The Power To Shape .

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Asset and wealth management revolution:The power to shapethe future.THE FUTURE OF FINANCIAL SERVICES

The year 2020 was a tumultuous one forsociety, the global economy, and assetand wealth management (AWM). Afteryears of steady growth, the industry’sasset base was whipsawed by rapidfinancial market movements, and thevolatility will likely be a feature for sometime to come.Even when vaccines and treatments help us stampout COVID-19, we won’t be going back to the worldas it was. At this moment of inflection, AWM leaderslike you have an opportunity. With US 110tn inassets under management (AuM) directed towardsenvironmental, social and governance (ESG)priorities, you literally have the power to change theworld. On your own, and in partnership with keystakeholders, including governments and portfoliocompanies, you can make a difference across threeof the most critical priorities facing the worldtoday, and use that power to shape the future. Funding the future: AWM firms can channelcapital and target investment opportunities to lifteconomies out of recession and sustain superiorfund returns. P roviding for the future: By delivering risk-adjustedreturns, firms can help people meet their savingsgoals and bridge pension gaps in the face ofeconomic fragility, ultra-low interest rates and asqueeze on government health and welfare budgets.2 PwC Asset and wealth management revolution mbracing ESG as the future: For some Einvestors, financial return will remain the solepriority. However, a growing number of investorsexpect AWM organisations to make ESG issuesintegral to their investment strategies. This shiftis already having a revolutionary impact onproduct design, fund allocation and performanceobjectives.As an AWM leader, your central challenge is to be ameaningful part of the solution while also meetingyour fiduciary obligation to optimise returns. Manyinvestors will no longer accept a trade-off.But endeavouring to rethink your organisation’spurpose across these three critical priorities tomake social and financial returns symbiotic is only thebeginning of the road ahead. It’s also time to repairyour operations to bring them up to the competitivebaseline and reconfigure your investment strategyand organisational capabilities to deliver on a newmission. The final part of the equation is to reporton how your business is changing and the progressyou’re making against your goals. In this report, wewill advise you on how to undertake each of thesefour critical actions.AWM organisations that deliver standout returnson both the social and financial fronts will be theclear winners over the coming decade—magnets forinvestment and able to sustain superior returns forshareholders and partners.AWM’S GLOBAL INFLUENCEGlobal assets under management (AuM)have grown by more than40%in the past five years.At more thanUS 110tn,global AuM is more than 20 timesthe US federal budget.Institutional investors hold more than40%of global market capitalisation. This is higherin some markets—e.g., the US at 72%.At US 41tn,nonbank lending to the private nonfinancialsector now exceeds bank lending in advancedeconomies.

PROJECTIONS FOR GROWTHGrowth in AuM depends on the speed and sustainabilityof economic recovery. PwC’s AWM Research Centre hasprojected three distinct scenarios:Best case: If increased fiscal stimulus measuresrevitalise economies and boost investor confidenceworldwide, economies across the globe would see arapid recovery from the fourth quarter of 2020, positivelyimpacting AuM growth.Base case: In a scenario of sustained infection andeconomic recovery in mid-2021, AuM growth would belower. We believe this scenario to be the most probable.Worst case: In a double-dip recession scenario, manycountries would face further waves of infection andlockdown. These circumstances would be accompaniedby a delay in vaccine development and deployment,resulting in economic recovery being delayed until theend of 2021. In such a scenario, AuM growth would besignificantly lower.The difference between AuM under the best- and worstcase scenarios is more than US 16tn, demonstratinghow much is at stake.In absolute terms, AuM expansion would be strongest inNorth America under any of the scenarios. Growth wouldbe fastest in Latin America and Asia-Pacific, albeit from amuch lower base. China is emerging as the ultimate prize,reflecting its size, room for further growth and the openingup of the market there to wholly owned foreign entities.Exhibit 1: Global AuM and regional split of global AuMGlobal AuM (US tn)Regional split of global AuM (US 025 worstcase2025 basecase2025 bestcase2015Forecastn Mutual funds n Mandates n Alternatives3 PwC Asset and wealth management revolution23.8139.11.68.4%4.811.8% 26.22.1%35.82.5%65.5147.41.95.313.5% 57.92020estimate2025 worstcase2025 basecaseForecastn North America n Europe n Asia-Pacific n Latin American Middle East and AfricaSource: PwC AWM Research Centre projections. Note: Numbers may not sum due to rounding.2025 bestcase

Rethinkingthe futureacross the three critical priorities of funding the future,providing for the future and embracing ESG as the future4 PwC Asset and wealth management revolution

Funding the futureGrowth in both passive and alternative investments is continuing. Although activeinvestments still make up most AuM, faster-growing alternatives are taking on muchof the alpha mantle, while passives are taking on the beta. We’re also seeing ablurring of the boundaries between active and passive investment, which includesgrowing demand for active exchange-traded funds (ETFs).Within alternatives, we are seeing the expansion of private markets.Public market investment in equities and corporate and sovereign bonds willcontinue to be a significant source of capital and lending. Yet, with record levelsof dry powder to put to work, it’s private markets that could provide the mainspringboard for recovery. Private equity investment could help turn aroundbusinesses in sectors hardest hit by COVID-19, such as hospitality, travel andleisure, and address the growing importance of ESG and digital engagementwith investors.Exhibit 2: Passives and alternatives lead growth, in US tnExhibit 3: Shift from public to private markets45.23.6%Passive .33.7%ETFsMandatesActive investments36.336.343.23.6%Passive 019891,9931988*Note: These forecasts include figures from our base-case recovery scenario.7,825201737.8201638.02015Active ual 0.92005Global AuM20,139Number of companies2004CAGR 2020–25estimate20032025 estimatebase case20022020 estimatebase case200120192000ProductsSource: PwC AWM Research Centre projections— US unlisted domestic companies with 500 employees — EU listed domestic companies— US listed domestic companies — UK listed domestic companies5 PwC Asset and wealth management revolutionNote: UK-listed company data is not available for 2015, 2016 and 2017; there is no data for unlisted companies availablefor the EU and UK.Sources: World Bank, US Census

Although smaller in total amount of AuM thanprivate equity, private credit will also play a keyrole in funding the future. Regulations put inplace after the global financial crisis of 2008to 2009 have increased the cost differentialbetween regulated and unregulated capital,significantly boosting the role of nonbank capitalproviders. Having expanded rapidly since 2010,nonbank lending to the private nonfinancialsector now exceeds bank lending in advancedeconomies. Any rise in business failures aseconomies continue to struggle would putincreased pressure on banks’ balance sheetsand ability to lend. Small- and medium-sizedenterprises could be especially vulnerable to anydip in the availability of bank credit. This wouldcreate an opportunity for private credit funds tofill the breach by helping finance businesses thathave strong growth potential but limited accessto mainstream funding.Exhibit 4: Global infrastructure and private credit AuMGlobal infrastructure AuM (US bn)Global private debt AuM (US bn) USD1.1tn USD1.0tn2,063.6 USD0.6tn2,162.3 USD0.7tn1,802.21,965.4 192025 worstcase2025 basecaseForecastSource: PwC AWM Research Centre projections6 PwC Asset and wealth management revolution USD1.2tn2025 bestcase201620192025 worstcaseForecast2025 basecase2025 bestcase

Further opportunities for AWM to fund the futureinclude making up for the growing shortfall in availableinfrastructure investment, especially from government.In developed markets, there are considerable openingsto refurbish roads, airports, hospitals and other suchinfrastructure while accelerating developments in areassuch as 5G and renewable energy. There is an evengreater need for investment in emerging markets, bothin traditional areas and in the new digital infrastructure,as we see increased urbanisation. As a result, weexpect AuM in infrastructure funds to double by 2025.7 PwC Asset and wealth management revolutionAlternatives will play a central role in getting economiesback on their feet and laying a foundation for growthwhile boosting risk-adjusted financial return. Thequestion for you, if you’re a mainstream manager, ishow much you will want to extend your alternativespresence. If you’re a private markets manager, you willneed to weigh investment opportunities against theincreased public scrutiny you will face by taking a moreprominent role in socially critical areas such as smalland medium-sized enterprise finance and infrastructuredevelopment.A retreat from globalisation, which has been heightenedby trade and geopolitical tensions exacerbated byCOVID-19, will create further challenges and leadto headaches in portfolio management, includingdisruption to supply chains. From an organisationalperspective, many regulators now expect your businessto maintain a local presence, ensuring, for instance,that most of your people and senior roles are based inthe territory where your business is based. Sovereignwealth funds might also come under pressure to investmore of their funds locally.

Providing for the futureProviding for the future is the other side of thecoin to funding the future—the more wealth wecan create as a society, the more we can save.And as people live longer, the AWM industry cancontribute to the resolution of escalating pensiongaps and retirement poverty. Providing for thefuture also opens up opportunities to develop acloser and more enduring client relationship, builtaround lifelong financial wellness, with digitaltransformation as the key enabler.Global population growth, a switch to definedcontribution plans, and lower and less attractiveannuity rates than in the past are boosting AuM.But ultra-low interest rates and low fixed incomeyields can make it hard for even the most diligentsavers to meet their goals. As a result, saversare looking elsewhere, including at managed funds.In retirement saving, specifically, pension funds nowmanage almost US 50tn in assets, and we forecastthat this will grow to US 62.5tn by 2025, providingan attractive opportunity for asset managers.8 PwC Asset and wealth management revolutionExhibit 5: Growth in client assets, in US tnClients20192020 estimatebase case2025 estimatebase caseCAGR 2020–25estimatePension assets49.449.862.54.6%Insurance rth individuals87.488.2108.34.2%Mass affluent76.577.394.64.1%Total client AuM255.1258.0317.64.2%Total AuM110.9112.3139.14.4%43.5%43.5%43.8%Sovereign wealth fundsPenetration rateSource: PwC AWM Research Centre projections

One of the key challenges you’ll face in providingfor the future, though, is delivering savings goals ina tough economic environment while helping lessknowledgeable investors protect themselves. Giventhe volatility in capital markets, further allocation toalternatives would increase diversification and lowershort-term fluctuations in investment valuations.Yet, alternatives are no panacea. Even if access isavailable, many investors may be reluctant to take onthe risks associated with complex and illiquid assets.Clients need to understand the products and the risks,which can be difficult, especially without access toface-to-face advice. Many fund managers may also bereluctant to open up alternatives to retail investors, evenvia pension funds, because doing so could exposethem to significant regulatory and reputational risk.Increased investment return and diversification mighthave to come from the capital markets. There has beena lot of focus on fee pressure and competition frompassives, but investors are prepared to pay more ifthey can get genuine value for their money.So, how can AWM boost savings? To start, yourbusiness could offer more education about the needfor and benefits of savings. Policymakers can supportthis with legislative changes and incentives. Oncepeople are convinced, incentivised and knowledgeableabout how to save, you can then work on engagingwith them more closely.9 PwC Asset and wealth management revolutionThe need to connect with clients without beingable to meet in person has accelerated digitisationin AWM. Even once-technophobic clients are nowacquiring a taste for a faster, more personalised,digital customer experience. To deliver, you’ll needto use data, analytics and artificial intelligence–enabled profiling to offer customised products andexperiences. Managers with advanced digital analysisand omnichannel engagement capabilities have beenable to maintain end-to-end client service withoutface-to-face interaction. Front-runners have also beenimproving their interactive visualisation to connectmore closely with clients and help them understandtheir investments.An increasing number of investors are adopting digitalplatforms and online trading platforms, especiallysince COVID-19 hit, which could pose a direct threat totraditional AWM organisations. Millennials have beenat the forefront of this trend, but other generations arecatching up fast. Human advisers still have a strongplace in the market, though, especially as investorstend to want both human and digital advice. So,you’ll have to determine what a person can do that amachine can’t.Many of these digital platforms offer day-to-dayspending analysis and money management inaddition to help with savings and retirement. Theseadditional features create an always-on relationshipand allow firms to develop richer and more revealingclient insights, which they can turn into more preciselytailored products.

Embracing ESG as the futureInvestors are putting the environmental and socialprofile of AWM firms on a level playing field withfinancial return. There will continue to be markets andinvestor groups that consider ESG to be a peripheralconcern. However, if you place less priority on ESG,you’ll have to ask yourself if you can afford to missout on arguably the most significant commercialdevelopment in money management since the creationof ETFs two decades ago.In European markets that are leading the way onembedding ESG, our analysis indicates that ESGassets will make up between 41% and 57% of totalmutual fund assets by 2025. And more than 75% ofEuropean institutional investors surveyed this year byPwC said they plan to stop buying European non-ESGproducts within the next two years. However, only 14%of European asset managers intend to stop launchingnon-ESG funds in the near future.The key challenge for managers is that investorswill still expect them to deliver strong financialperformance. Some AWM organisations believe thatthere is an inevitable conflict between yield and doingthe right thing, but the two may be more compatiblethan you would think. A survey by Morgan Stanley at10 PwC Asset and wealth management revolution

the end of 2019 found that almost 80% of institutionalinvestors view sustainable investing as a risk mitigationstrategy. Our own analysis shows that ESG-aligned fundscumulatively outperformed their traditional counterpartsby 9% from 2010 to 2019. A study by the PetersonInstitute of International Economics also shows thatdiverse companies, in which more than 30% of leaders arewomen, are, on average, 15% more profitable than thosethat aren’t diverse, and businesses that score highly onsustainability tend to outperform those that don’t.But there aren’t agreed-upon criteria to define responsibleinvesting. And what is acceptable now may not be in thefuture, so it’s important to keep your ear to the groundand be proactive in responding. For example, COVID-19has put a spotlight on social inequity. And many thinkCOVID-19 should be a catalyst for creating a more fair andgreen economy. Movements such as #MeToo and BlackLives Matter have also directed attention to diversity,equity and inclusion in business and society.You really do have to put your money where your mouthis, though. It’s not enough to dabble in ESG. If you do,you risk being called out for ‘greenwashing.’ The mostfocused investors will expect you to have clear criteria forinvestments, exert your influence as a shareholder andreport the results you’ve achieved. This includes standingup against discrimination or environmental damage, evenif the business in question has strong financial earningspotential.11 PwC Asset and wealth management revolution

Repairing what’s notworking right now12 PwC Asset and wealth management revolution

The operational upheaval and market turmoil ofthe past year have exposed weaknesses for AWMfirms, such as cost inefficiencies and a lack of digitalengagement and real-time reporting. The first stage ofdelivering on your rethink will be fixing these problems.We advise five key repairs to set a solid foundation forthe future.Calibrate quickly with clients: Ask yourself whatclients want and how you can move quickly to deliver.For example, if you’re facing questions over value formoney, then performance-based fees or increasingallocation to high-yield alternatives could be theanswer.Sharpen digital connectivity: Look to vendors andfintech innovators to help you connect with clients anddevelop interactive reporting and faster response toenquiries.13 PwC Asset and wealth management revolutionClear out the legacy: Implement fast and effectiveways to drop the deadweight of legacy systemsand lay the foundation for a more digitally enabledbusiness. For example, you can apply robotic processautomation to routine tasks and move to a softwareas-a-service (SaaS) cloud platform.Rationalise portfolios: Re-evaluate portfolios andreturns before closing or merging unprofitable funds.This will enhance product strength, marketability andprofit potential.Outsource your noncore operations: If youhaven’t already, outsource your noncore operationsand refocus on your core competencies. As thesophistication of service providers increases, there areopportunities to outsource higher-value operations,too, such as investment modelling, transactionprocessing, compliance reporting, tax and legal.

Reconfiguringto pull ahead14 PwC Asset and wealth management revolution

Basic repairs can only get you to the competitivebaseline. Meeting your new objectives over the longterm requires you to reconfigure your investmentphilosophy, investment execution and relevantcapabilities.Align your investment philosophy: If ESG is a realpriority for your business, as we believe it should be,then it’s important to think about

2 PwC Asset and wealth management revolution The year 2020 was a tumultuous one for society, the global economy, and asset and wealth management (AWM). After years of steady growth, the industry’s asset base was whipsawed by rapid financial market movements, and the volatility will likely be a feature for some time to come.

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