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Money Management

McKinsey report cites common traits of money managers posting strongest growth in Asia

Investors stand at trading terminals in front of an electronic stock board at a securities brokerage in Shanghai.

Strong partnerships in China, a combination of local and global investment skills and programs to nurture investment staff will be keys to money manager success in Asia's fast-growing asset management market in coming years, according to McKinsey & Co.

A report released Wednesday by McKinsey —"Will the good times keep rolling for Asia's asset managers" — said interviews with executives from 22 local and global managers in the region showed a wide dispersion in gains from the heady annualized 13.8% growth in Asia-Pacific assets under management for the five years through 2017.

Eight of the 22 managers averaged annualized AUM growth of 28% for the five-year period, while four reported gains of 11%. At the lower end, the remaining 10 firms averaged 2% growth.

Anu Sahai, Singapore-based senior expert with McKinsey and lead author of the report, in an interview declined to identify specific firms. But she noted some of the common traits among managers reporting the strongest growth.

Some were obvious, such as having made big bets on China — the epicenter of regional asset management growth. Others were more subtle, such as the strength of programs to retain and nurture investment talent, corporate cultures marked by long-term commitments to build businesses in Asia and the stability of leadership teams, she said.

The report predicts annual revenues for money managers in the Asia-Pacific region will almost double to $112 billion by 2022 from $66 billion for 2017, helped by a relatively high investor demand for actively managed strategies.

The report noted that profit margins from investing in Asia, at 22.6% for 2017, were almost double the margins managers enjoy in North America and Western Europe.

That gap in favor of Asian business was helped by strong demand for higher-margin strategies. The report noted that almost 70% of mandates awarded in 2017 by institutional investors were for multiasset and alternatives strategies.

While the broad array of countries in the region at different stages of development make it tough to craft a pan-Asian business strategy, McKinsey cited three macro themes promising handsome returns for money managers:

  • The "great wall" of Chinese capital.
  • The growth of institutional retirement pools in developed markets such as Japan and Australia.
  • The fast-growing wealth management segment in markets such as India and Southeast Asia.
China's market is expected to offer the biggest opportunity, with an estimated $6 trillion in new assets for money managers over the five years through 2022. However, the importance of continued regulatory reforms in realizing that opportunity makes for considerable uncertainties when it comes to timing, noted Ms. Sahai.

Over the same five-year period, wealth management opportunities should expand by more than $2 trillion, she said. McKinsey also expects institutional retirement assets overseen by external managers to grow by $1.2 trillion over the coming three years.

While managers already oversee more than $1 trillion in offshore allocations by big Chinese institutional investors, with further growth likely, McKinsey said the biggest opportunity going forward will be serving Chinese investors on the mainland through a local presence.

For foreign managers that formed joint ventures with local partners — their only means of serving local retail investors on the mainland for the first 15 years or so of the Chinese asset management industry's short history — success stories have been few and far between, noted Ms. Sahai. Over the past few years, global managers have been allowed to set up wholly owned enterprises on the mainland to serve local high-net-worth and institutional investors. Those wholly foreign-owned still need strategic partnerships with local distributors to succeed, she said.

Meanwhile, McKinsey predicted firms with local manufacturing capabilities will continue to do better than firms focused strictly on selling their global products to clients in Asia.

The McKinsey report said firms with established local manufacturing capabilities, either direct or through partnerships and acquisitions, reported annualized AUM growth of 24% over the past five years, roughly double the growth of managers focused on distributing global products in the region.

In an email, Ms. Sahai said McKinsey expects that blended approach to remain more successful going forward, even as restrictions on local investors allocating money overseas recede in the future.