Worldwide assets under management (AuM) will hit $101.7 trillion by 2020, of which the alternative asset market is set to take up an increasing share, growing to between $13.6 trillion and $15.3 trillion. The biggest movers in the sphere of alternative investment according to research by PwC are sovereign investment funds, driven by the search for better divestment and yield opportunities, particularly by the HNWIs and the mass affluent. For asset managers, an emerging market strategy is key.
In a recently released report from PwC, the accounting and consulting giant analyses the state of the assets management industry, and considers changes to the investment market that are seeing alternative asset classes rise in popularity*. The majority of analysis is based on IMF economic growth predictions, and the firm's hypotheses and modelling for the period 2015 - 2020.
The study finds that worldwide assets under management (AuM) in 2012 totalled $63.9 trillion globally. AuM is made up of a diverse range of asset classes, including mutual funds, mandates and alternative investments, with active AuM currently accounting for 79% of the market. According to the researchers, the global assets under management industry will rise to around $101.7 trillion by 2020, which represents a compounded annual growth rate (CAGR) of nearly 6%.
The researchers also look into the growth of alternative assets between now and 2020. This class of assets is made up of mostly private equity, real assets and hedge funds. These assets are generally considered less liquid than more traditional stocks, however, they have the advantage of long term growth and sustainability. According to PwC’s model, which applies both a high case and low base scenario, the alternative asset market is set to grow by between 8.1% and 9.9% in the coming five years, to between $13.6 trillion and $15.3 trillion. The highest growth segments within the class for the base case are real assets, growing at 8.9%, followed by private equity, growing at 8.8%.
The different projections are based on possible macro-economic differences, with high performance of capital markets driven by accommodative monetary policies and stable GDP growth, pushing alternatives towards the high case scenario. The possible rise of interest rates in the US and Europe, coupled with a normal correction in the capital markets, stands at the basis of the base case.
According to the research there are three broad trends driving the push for alternative assets, including a government-incentivised shift to individual retirement plans; the increase of high-net-worth-individuals from emerging populations; and the growth of sovereign investors. Of these three groups, the sovereign investors have the most clout. These investors often have extremely large funds, made up of the contributions of citizens – by 2020 the sovereign investor assets are projected to hit $15.3 trillion.
As part of their remit to citizens, sovereign wealth funds (SWF) and public pension reserve funds (PPRF) will need to continue to seek high levels of transparency. Regionally the number of sovereign investments funds is set to rise, from the 125 today to 146 by 2020, with particularly the Asia-Pacific region adding funds. Sovereign wealth funds are expected to, depending on their objectives, invest part of their wider funds into the alternative market. According to the research, sovereign investors with capital maximisation objectives will search for higher alpha and diversification, lifting their alternatives portfolio to 14% in 2020 with the majority invested in real estate (41%) followed by private equity (38%).
For sovereign investors with economic development objectives investment in alternatives will be higher, accounting for 29% of sovereign investors’ portfolios in 2020 with 79% of that allocation being in private equity and infrastructure. While sovereign investors with stabilisation objectives have shorter term investment horizons and prefer less risk, thereby limiting their alternatives stock.
HNWI and the mass affluent
Another area in which alternative assets will benefit from growing interest taken up is from high-net-worth individuals (HNWI) and the mass affluent. According to a recent study from BCG, global private financial wealth will in the coming years grow from $164.3 trillion in 2014 to $222.1 trillion in 2019, with millionaires, HNWI’s and ultra-HNWI’s holding a majority share. This group of investors with sufficient funds to seek investment opportunities have considerable finances available to them. PwC has calculated that the HNWIs, for instance, had a total of $52.4 trillion at their disposal in 2012, the majority of that capital held in the North American and European region. In the coming years the capital is expected to grow by 50% at an annual rate of 4.9%, hitting $76.9 trillion by 2020. The biggest gains in the funds of HNWIs being seen in the Asian-Pacific and Latin American regions.
The mass affluent too are expected to do well in the coming period, with the groups asset base expected to grow by 6.8% annually until 2020 to a total of more than $100 trillion in assets. Again, the regions to see the most growth in assets are Asia-Pacific and Latin America. By 2020, the mass affluent in North America will hold 20% of the global share, while Europeans will sit on 31% of the wealth.
To capitalise on the increase in assets, PwC considers the kinds of moves required to open up particularly the Asian-Pacific region to alternative assets managers – the firm saying that: “By 2020, firms that have successfully integrated emerging market regulatory requirements into a global compliance framework will have a competitive advantage. These firms will have achieved more consistent, efficient global compliance controls, resulting in cost savings and reduced regulatory risk exposure.”
* The report is titled ‘Alternative Asset Management 2020: Fast forward to Centre Stage’ and is based on an earlier report from PwC titled ‘Asset Management 2020: A Brave New World’.