In a 2016 analysis, global consultancy PwC predicted that assets under management (AuM) would reach $111 trillion in 2020 and $145 trillion in 2025. The forecast does not include the economic situation that the COVID-19 pandemic has created and the consequences of the measures taken against it.
An up-to-date study from 2023 shows that asset managers faced a tough year in 2022, with assets under management (AuM) falling to US$115.1 trillion, nearly 10% below the 2021 high (US$127.5 trillion). This represented the greatest decline in a decade.
Looking to the next two years, inflation, market volatility, and interest rate movements are by far the biggest concerns for both investors and asset managers. However, we expect to see a rebound by 2027, with AuM reaching a base case of US$147.3 trillion, representing a compound annual growth rate (CAGR) of 5%.
In other words, the old target will be reached two years late – as long as it took the world to recover from the pandemic’s ravages. Chief among these were the emergency measures taken by the world’s leading central banks – further artificially lowering interest rates, increasing the money supply, buying debt, etc.
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This has brought in its wake a short-term stabilization of the markets and the world economies, but the defects of such monetary policy are already visible to the naked eye – still high inflation, rising interest rates, and a difficult-to-predict environment.
Unpredictable environment, difficult outcomes
At the same time, many people especially portfolio managers who work in the asset management business have little or no experience working in this uncertain economic and high-interest environment, which may last longer because of labor shortages and political instability.
While dealing with the current storm, they also have to make choices and investments that will change their businesses and give them long-term growth and stability, which is one of the key findings from the study.
Alpha will be harder to find, and the beta from growing markets may be threatened by money market funds and even bank deposits. We’ve already seen some people move their money from stocks to safer bonds and money market funds.
There have also been large reallocations: to passive investments as investors look for a clear, liquid, and low-cost option, and to private markets as investors step up their search for returns and hedges against market volatility.
The result: active managers who mostly work in the public markets may continue to lose market share because of this. Also, if interest rates stay around 4% through 2024 and beyond, managers of private markets will have to raise their goal internal rates of return (IRR) by a lot just to stay competitive.
This is already hard to do because of the tough economy and the end of cheap funding. In a market that is getting more crowded, data and predictive analytics will be used more to find unique business opportunities outside of the mainstream.
As the global economy starts to grow again and inflationary and interest rate pressures ease, global asset management revenues will bounce back to hit US$622.1 billion by 2027, beating the record high of US$599.1 billion in 2021. PwC thinks this rise will be driven by a continued rise in private market revenues, which will make up about half of global asset management revenues by 2027, up sharply from 37.6% in 2020.
Technology as a new infrastructure
The way investments are made, assets are held, and contracts are settled are also being changed by technology. Because of this, large parts of the industry’s infrastructure could become useless.
Tokenization adds to this change by making markets easier to get into and by making the fund system easier to understand. Tokenized securities are smart contracts made possible by blockchain that use a token to transfer ownership and give rights like dividend payouts.
Tokenization has mostly been used for real assets so far, but in theory, it could be used for almost any kind of investment. This would change the time, cost, and paperwork involved in trade settlement, custody, and payment approval.
The latest advances in AI help make this increasingly digital world possible. Some private wealth managers are already using generative AI to innovate in the middle and back office, and applications like robo-advice are gaining popularity in some markets. By 2027, the amount of money handled by robo-advisors will be more than double what it was in 2022 when it was only US$2.5 trillion.
However, adoption has been slower in some markets, which suggests that more work needs to be done to make this plan work. More developments made possible by AI include better trading tactics and generative AI, which makes it possible to look more closely at unstructured data.
The future is still hard to predict
In the end, the wealth management business in 2023 faces problems that were not expected and growth expectations that were not met. The long-term effects of the COVID-19 pandemic and the unusual monetary policies of central banks have changed the way the world economy works. Because of this, asset managers have had a big setback, and the amount of money they handle has gone down below what they had expected.
The future is still hard to predict because inflation, market instability, and changes in interest rates are all on the horizon. Still, there is hope that the industry will recover, albeit slowly, by 2027 as it tries to hit the asset levels that were originally predicted. Asset managers are navigating uncharted seas, adjusting to an environment with high-interest rates, and making smart investments to ensure long-term growth and stability.
In this constantly changing environment, technology is showing to be a powerful force that is changing the way investments are made and managed. Tokenization and AI are bringing in a new era of speed and innovation, and they could help solve some of the problems that the industry is facing.
Wealth management adjusts to these changes, but it is still important for market participants to stay flexible, use technology, and keep changing their tactics in order to do well in this changing environment.
