Despite economic uncertainties rising from the pandemic, the asset management industry has surpassed the centi-trillion mark to reach $103 trillion in assets under management at the end of 2020, an increase of 11 percent from the previous year, according to Boston Consulting Group’s annual report on the industry expected to be released Thursday.
Of the total, institutional investments represented 59 percent at $61 trillion, while retail portfolios comprised 41 percent of the global assets, or $42 trillion. North America was seen as the main driver of growth and held the lion’s share of assets at $49 trillion.
As the end of the pandemic draws near and remote-working models become “permanent fixtures,” BCG called on asset managers to seek growth opportunities in private markets and data and analytics, which it said will be crucial to everything from client engagement and distribution to customized investment products.
‘The Next Big Wave’
According to the report, investments in private markets increased 12 percent annually to $8 trillion as of September. BCG pointed to this asset class as a key opportunity for asset managers that cater to retail investors — a cohort that contributed 4.4 percent of net inflows last year across all asset classes. These included customized offerings, “especially when it comes to ESG products, thematic ETFs, direct indexing, and separately managed accounts at scale,” the report stated. “We believe the next big wave is likely to come from retail investors, who have largely remained on the sidelines as private markets have expanded.”
The democratization of alternatives came closer to materializing last year, after the U.S. Department of Labor issued a letter in support of private equity investments in defined contribution plans, where individuals can pick their own funds. This prompted large institutions to make these assets more accessible, according to BCG.
BCG said that managers marketing to retail investors will need to make education a top priority. “Retail investors and their advisors need to understand that, along with their potential for higher returns, private market assets carry a longer lockup period and a higher risk profile than public market assets,” according to the report.
“The difficulty lies in how you incorporate it into the products in a way that truly improves the returns for retail investors and how do you explain the risks and benefits that come with the asset class, which is quite different from the products that have been sold to these investors so far,” said Lubasha Heredia, a partner at BCG who co-authored the report.
As the retail base grows, BCG also anticipated the ramp up of manufacturing and distribution capabilities in the space through three methods: private fund managers competing directly with traditional asset managers; asset managers embracing mergers and acquisitions or bringing on teams that can build the capabilities; and managers partnering with middle-tier players to combine their expertise.
Opportunities in ESG
The report also highlighted private market players as being in a prime position to drive sustainable change, due to their longer hold periods and controlling stakes. BCG said these managers could make an impact by mandating board diversity and aligning investments with sustainability metrics. “Our research finds that buyers are increasingly willing to pay a premium for assets that have undergone a sustainability transformation,” the report stated.
One major caveat, however, is the sheer lack of ESG metrics for privately held companies, compared to their publicly traded counterparts. The leaders in this space will look to overcome the void by gathering data directly and collaborating with competitors to accelerate the development of ESG standards, BCG said.
“The most important part of [this report] is that it’s a story of growth and it’s a story of opportunities,” Heredia said. “It’s impressive that after the terrible year that we all had, there could be such a positive way of thinking of it and how to take advantage of [the] growth to move forward.”