Asset Management Industry

Asia Pacific Region

In

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CONTENT

IntroductionAsset Management Industry SnapshotAsset Management Industry- OverviewAsset Management ServicesDemographic TrendsEmerging MarketsIndustry challenges & IssuesAsset Management Industry OutlookGlobal Asset Management Industry GrowthHedge FundsPension FundReal Estate In Asia PacificMutual FundAsset Management Industry – Key ChallengesAsset Management Industry – 2020Key Market Trends and Recommendations

INTRODUCTION

The report examines industrial organization and institutional development of asset management industry economies in Asia Pacific. We focus on the size and growth of the buy-side of the respective financial markets, asset allocation, the regulatory environment, and the state of internationalization of the fund management industry in its key components – mutual funds, pension funds and asset management for high net worth individuals.

Report links these to the evolution of professional asset management in these environments to the development of the respective capital markets and to the evolution of corporate governance. Fund management industry occupies a very small niche in domestic financial systems that are dominated by banks.

We will pay more focus on Exchange Traded Funds. Exchange Traded Funds (ETF’s) are one of the fastest growing segments in the asset management industry and ETF’s in Asia have evolved over the past years and experienced double digit growth year after year since 2008.

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ASSET MANAGEMENT INDUSTRY SNAPSHOT

Amid unprecedented economic turmoil andregulatory change, most asset managers haveafforded themselves little time to bring the futureinto focus. But the industry stands on theprecipice of a number of fundamental shifts thatwill shape the future of the AM industry.

The way many asset managers operate in2020 will be significantly different compared withthe 2013 model. Wei, represents just oneexample of how funds might be sold anddistributed in 2020.

Global investable assets for the assetManagement industry will increase to more than$100 trillion by 2020, with a compound annualgrowth rate of nearly 6%. Asset managers mustboth create positive social impact and deliver theclear message that they are a force for good, toinvestors and policymakers.

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ASSET MANAGEMENT INDUSTRY- OVERVIEW

The asset management industry is comprised of firms that purchase, hold and sell securities for investment purposes. Many different types of firms participate in the investment management industry, such as mutual fund companies, investment advisors, banks, insurers, brokers, third party administrators and service providers. Asset Management and Investment Management are used interchangeably.

The major objectives that asset managers strive to achieve include:

• Creating superior investment returns within the parameter of a portfolio’s investment mandate (as measured against its performance benchmark and its defined peer group)

• Managing the execution costs of growing trading volumes, and convincing clients that the firm maintains the necessary technology infrastructure to manage money well and cost effectively.

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ASSET MANAGEMENT SERVICES

Asset Management Services are typically divided into two business groups which serve the needs of institutions and wealthy individuals.

Asset Management Services

Private Banking/ Client Services/ Wealth ManagementInvestment Management

Wealthy individualsInstitutions

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DEMOGRAPHIC TRENDS

More than half of the world population of 3.45 billion are in the Asia’s Pacific region. ThePopulation of Asia Pacific region is projected to rise by more than 400 million people in the nexttwo decades. There are extremely wide variations in the population sizes of the 48 countriesand areas in the Asia Pacific Region, with very small Island countries such as Niue, having lessthan 2000 inhabitants in 2005, to giants such as China and India with populations of 1.31 billionand1.3 billion respectively.

Another major demographic change is population growth in Asia and Africa. It is predicted thatover 75% of the world’s population will reside in Asia Pacific and Africa by 2040 and India is expected to havethe world’s largest population by 2030. This means there will be a massive growth in demand for food andenergy in those countries and companies that service those needs should be good investment opportunities. The overriding influence on equity markets in the next 20 years is likely to be ongoing pressure on scarce resources-primarily food, energy and water.

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Succession planning is gettingincreased attention in AsiaPacific, with a large number ofHNW clients now acknowledging the need for such services. In fact, research shows successionplanning services are nowdeemed to be “important” bymore HNWIs in Asia-Pacificthan in most other regions.

DEMOGRAPHIC TRENDS CONTINUES

The demographics of the HNWI population in Asia-Pacific, especially in some of the fast-emerging markets, are creating a growing need for succession-planning services, but Firms will need to cater to the significant differences between markets in the region.

Number of HNWIs by region

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EMERGING MARKETS

The emerging markets once again grew at a faster clip than markets in the developed countries. In 2012, AuM grew 16% overall in emerging markets, rising by a compound annual growth rate (CAGR) of 9% above its 2007 precrisis level. Emerging markets overall now represent roughly 8% of global AuM, compared with 6% in 2007.

China and Brazil in particular enjoyed robust growth in 2012, with increases of 23% and 15%, respectively. The market recovery and the appreciation of bonds were strong drivers. Net flows also contributed to growth on average 5% in Asia (excluding Japan and Australia) and 2% in Latin America. From 2009 through 2012, they provided 11% and 6% of global growth, respectively.

Asia, excluding Japan and Australia, represented $3.8 trillion of AuM an increase of 17% in 2012. Both the retail and Institutional segments contributed solid growth: 22% and 15%, respectively.

In the developed markets, which represent roughly 90% of global AuM, managed assets grew 9% in 2012. On average, developed markets have grown at a CAGR of 1% since 2007.

Top ten strategies by 2012 Net sales (Billions)

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INDUSTRY CHALLENGES & ISSUES

Opportunities for asset managers are increasing, but their strategic challenges and operational complexities are keeping pace.

• Under pressure from regulators and investors, the boards of asset management (AM) companies and funds have greater oversight responsibilities than ever. Governance

• The financial crisis and its aftermath revealed the true extent of asset managers’ risks. High correlations between credit, market, liquidity and valuation risks underscored the need for more adaptive approaches to investment risk management.

Risk

• New regulations are creating a complex web of regulations around the globe, just as national regulators step up their scrutiny and enforcement procedures. Regulatory Complexity

• Evolving regulatory regimes, combined with greater and more complex transaction volumes, are stretching front-, middle- and back-office systems. Operations & Technology

• Asset managers are finding that greater transparency enhances trust – building confidence in reporting accuracy, governance and accountability.Trust & Transparency

• While M&A volumes have failed to meet expectations in the past year, asset managers have good strategic reasons for making acquisitions. Strategic M&A

• Growth is struggling against the headwinds of economic uncertainty and market volatility. Asset managers are scrutinizing their businesses to find ways of strengthening their market positions and exploiting the few growth opportunities that exist.

Organic growth

• As signs of tentative market recovery continue, asset managers are investing in recruiting and retaining talent. Competition for the best people is as great as ever.Human capital

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ASSET MANAGEMENT INDUSTRY OUTLOOK

In the latest Global Financial Centres Index survey, Hong Kong and Singapore were ranked third and fourthrespectively for its asset management industry for three consecutive years, while the top two places wereoccupied by London and New York. China is also a huge market for the asset management industry. However,due to the restrictions on foreign exchange and financial markets, foreign-funded asset managementcompanies face difficulties in entering the Chinese market, while Chinese companies need approvals wheninvesting overseas. Thus, The analysis on the development of China’s asset management industry focuses ondomestic markets, while assessments of the Hong Kong and Singapore markets, which are completely open, are based on their potential in becoming regional hubs for asset management.

Singapore intends to strengthen regulatory oversight over the fund management industry in the year2012. Fund management companies with more than S$250 million in assets will be required to obtain a licensefrom the Monetary Authority of Singapore, while smaller funds will have to register with the regulator.

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GLOBAL ASSET MANAGEMENT INDUSTRY GROWTH

The rising importance of South America, Asia, Africa, Middle East (SAAAME)

Assets under management in the SAAAME economies are set to grow faster than in the developed world inthe years leading up to 2020, creating new pools of assets that can potentially be tapped by the AM industry.However, the majority of assets will still be concentrated in the US and Europe.

In 2010, Asia ex-Japan’s weightage in the MSCI World Index was only 9%, while its total contribution to GDPapproximated 18%. By 2020, Asia ex-Japan’s contribution to GDP could be well above 25%. As this becomesreflected in the MSCI World Index, it will result in new and substantial money flows into the capital markets of theEast. These flows will be considerably enhanced by the likely internationalisation of the Chinese renminbi by 2020,which will open up what will eventually become one of the world’s significant AM markets.

In 2012, the AM industry managed 36.5% of assets held by pension funds, sovereign wealth funds (SWF), Insurance Companies, mass affluent and high-net-worth individuals (HNWI). Model predicts that, by 2020 the AM industry will Manage $101.7 trillion of clients’ assets, implicitly assuming the penetration rate to remain constant. However, given the AM industry is successful in penetrating these clients assets further, we believe that the AM industry would be able to increase their share of managed assets by 10% to a level of 46.5%, which would in turn represent a $130 trillion in Global AuM. Global AuM projection by region for 2020 12

ASSET MANAGEMENT INDUSTRY GROWTH CONTI…

At the client level, the global growth in assets will be driven by three key trends:

• The increase of mass affluent and high-net-worth-individuals (HNWIs)3 from SAAAME.• The expansion and emergence of new SWFs with diverse Agendas and investment goals.• The increasing defined contribution (DC) schemes partly, Driven by government-incentivised or governmentmandated shift to individual retirement plans. Foundations and endowments Will also continue to gather AuMas the generations born after World War II continue to bequeath part of their wealth. These foundations andendowments will rely predominantly on asset managers to earn returns on their capital.

The rise of SAAAME as an opportunity for asset managers

In a recent PwC survey, more than 40% of asset Managers in developed countries looking to other countries for their long term future believe the most important geographical area of focus will be the SAAAME region. SAAAME markets will provideopportunities for existing global asset managers to tap new pools of wealth and significantly expand their franchises (as we explore in the second section of this report). But it will equally provide the backdrop for a number of fast-growing SAAAME-based Competitors to emerge and not only take on the global managers in SAAAME regions, but in developed markets as well.

Global HNWI asset projection by region for 202013

ASSET MANAGEMENT INDUSTRY GROWTH CONTI…

Mass affluent clients and HNWIs in SAAAME regions are key drivers of growth

From more than $59 trillion and $52 trillion, respectively in 2012, assets owned by mass affluent4 andHNWI investors are expected to rise to more than $100 trillion and $76 trillion respectively by 2020. Thegrowth is expected to be higher for the mass affluent sector (with a CAGR of 6.8%) than for HNWIs (4.9%). Thesingle greatest contributor to this surge in mass affluent and HNWI assets is increasing SAAAME wealth. Massaffluent clients in SAAAME regions will, for instance, more than double their wealth between 2012 and 2020.

The global middle class is projected to grow by 180% between 2010 and 2040, with Asia replacing Europeas home to the highest proportion of middle classes, as early as 2015. Between 2010 and 2020, more than onebillion more middle class consumers will emerge globally, representing the largest single-decade increase in customers in history. This increasing affluence will fuel the need for financial products for a young and growing constituency. In addition to the HNWI growth, there will be a massive increase in the middle class in the developing regions. Although the growing middle class represents low individual wealth, there is significant opportunity to serve that demographic if done thoughtfully and efficiently.

Global mass affluent wealth projection by region for 202014

Asia-Pacific has been a growing region in the hedge fund industry in recent years as both investors and managers have realized the potential of this emerging region for alternative investments. This is a significant period for the hedge fund industry in the Asia-Pacific region. New developments, in particular the advent of the new Securities Investment Funds Law in China, could lead to significant changes in the region and provide a boost to the hedge fund industry.

Breakdown of Asia-Pacific investors by type

Over recent years, the Asia-Pacific region had been growing in prominence in the investment community at large. Driven by the rapid economic growth of countries like China, one of the key developments has been the rapid expansion of the financial markets in the region. This development offered hedge fund managers in the region a multitude of investment opportunities, and also indirectly led to a gradual maturing of institutional investors in the region, with increasing numbers of investors based in Asia-Pacific looking to invest in hedge funds in search of higher yield and diversification.

HEDGE FUNDS

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HEDGE FUNDS CONTINUES…

Despite the advent of Abenomics in Japan and robust numbers from Southeast Asia, the overall financial outlook of the Asia-Pacific region is looking stormy. Afflicted with concerns like a slowing China and crippling levels of inflation being battled in India, overall growth rates in the region are slowing.

Breakdown of Hedge Fund mandates Issued by Asia-Pacific Based Investors by Type

However, a deteriorating macro-economic environment may be the catalyst for further increased interest in hedge funds, as asset managers from the region continue to hunt for higher yields. 41% of Asia-Pacific based institutional investors plan to increase their allocations to hedge funds over the coming 12 months and 45% plan to maintain their allocations. As a result, there should be plenty of Opportunities for hedge fund managers to attract new investment, with the majority of investors in the region looking to at least maintain their level of exposure over the coming year.

Asia-Pacific based hedge fund managers currently represent less than 4% of total hedge fund industrycapital despite the region being home to a substantial number of managers. This is well below the share of assets Asia-Pacific contributes to the overall global financial economy, suggesting there isopportunity for the hedge fund industry in the region to grow significantly in the future.

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Asia-Pacific-focused hedge funds have outperformed the overall hedge fund benchmarks in both 2013 (as of July 31) and 2012, as well as on an annualised basis over the past two, three and five years. A comparison of rolling 12-month returns by regional focus is presented in below chart. A comparison of rolling 12 months by regional focus shows that Asia-Pacific hedge funds have had lower returns when compared to their North American counterparts over most of the last three years. However Asia-Pacific was the best performing region over the 12-month period ending July 2013, posting a return of 18.61% compared to returns of 15.38% and 11.97% achieved by North America and Europe- focused funds respectively. Performance of Asia-Pacific-focused Hedge Funds

vs. All Hedge FundsEquity-based funds dominate the hedge fund market in Asia-Pacific and long/short funds in the Asia-Pacific-focused benchmark posted impressing 12-month net returns of +22.06% for the period endingJuly 2013. The top ten performing funds managed by Asia-Pacific firms for the 12-month period ending July 2013 were funds using a long/short approach. Asia-Pacific long/short funds have outperformed the overalllong/short benchmark over the past 12 months and also on an annulised basis over the last three and five Years. These funds have also significantly outperformedEuropean long/short funds over these periods, althoughthey have fallen slightly short of North America-focusedlong/short funds on an annualised basis over the last three and five years.

HEDGE FUNDS CONTINUES…

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Asia-Pacific-based hedge funds focused on the region and Asia-Pacific-focused hedge funds that are managed by firms headquartered outside of the region. The chart shows that in each of the last six years, hedge funds based in the Asia-Pacific region have achieved higher returns in times of positive performance and harsher losses in times of negative performance. Despite the increased volatility, it seems that Asia-Pacific-based funds have produced stronger risk-adjusted returns in recent years, with the three-year Sharpe ratio (measured with a risk free rate of 2% as of 31 July 2013) for these funds measured at 0.77 compared to 0.46 for Asia-Pacific-focused hedge funds headquartered outside of the region. Over the course of the year so far, Asia-Pacific based funds have produced returns which are nearly three times higher than funds which are based elsewhere focusing on the region. This suggests that Asia-Pacific-based managers may have been been best placed to generate strong returns off of the burgeoning markets caused by developments such as Abenomics.

In the past Asia-Pacific hedge funds have been perceived to be risky investments, with higher risk than their counterparts based in Europe and North America. However, over the past 12 months these funds have been successful in achieving positive performance and providing attractive risk-adjusted returns. The impressive performance of Asia-Pacific funds in the last 12 months has attracted the notice of investors both at home and further abroad; this could enable the Asia-Pacific hedge fund industry to grow to record levels in the coming years. Despite these positives, Asia-Pacific hedge funds continue to have higher volatility than the global hedge fund average, and this is something which may continue to deter more risk-averse investors from allocating to the region.

HEDGE FUNDS CONTINUES…

Performance of Asia-Pacific-Based vs. Asia-Pacific-Focused Hedge Funds, 2007 - July 2013

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PENSION FUND

Global pension fund assets projection by region for 2020

Pension fund assets will reach close to $57 trillion by 2020

Retirement assets have risen from $21.3 trillion in 2004 to $33.9 trillion in 2012 and we predict they will grow by 6.6% a year to reach $56.5 trillion by 2020.

Defined Benefit (DB) schemes will persist for the balance of this half-century and even though the majority of them will be frozen and/or defeased, they will continue to represent a critical mass of AuM. However, the increase in investable assets mainly stems from DC schemes created in countries of fast-growing GDP and prosperity. By 2020 DB schemes will represent a far smaller, though not insignificant, pool of assets; however, DC will be dominant model for retirement savings. The growth in pension assets and the regional breakdown are shown below.

Pension funds will swell the total assets managed as both developed and developing countries attempt to bring more savers under the retirement umbrella. Growth in new pension assets will be strongest in Latin America and Asia Pacific with growth rates above 9% each. But the US and Europe will still have the largest pools of assets in 2020 – above $30 trillion in North America and close to $14 trillion in Europe.

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An important real estate theme that has developed since the aftermath of the recent financial turmoil is the rapid growth of APAC’s invested stock, which by definition and according to DTZ refers to the value of commercial real estate held by investors. These stocks are typically of good quality and are attractive as an income generating asset. Given Asia remains in a better shape economically and with the relative stability of its financial markets, invested stock grew by 13% in US dollar terms as compared to 8% in Europe and 0% in North America.

Within Asia, China unsurprisingly leads this expansion as its invested stock reached USD 1.3 trillion in 2011, not far behind Japan’s USD 1.4 trillion which remains APAC largest market, home to circa 36% of the region’s total invested stock Based on current pace of growth, China should by 2013, become Asia’s largest invested market despite a vast majority of existing investment capital still domestically sourced.

The potential for further stock growth is clear as China has yet to truly access the queue of capital for its domestic market. On the other hand, this easing of capital flow restriction may

potentially redirect some of the domestic capital across the, region with the gateway cities; e.g.

Singapore, Hong Kong and Sydney likely to be the immediate beneficiaries .

REAL ESTATE IN ASIA PACIFIC

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MUTUAL FUND

Mutual funds and mandates to grow in tandemMutual funds are expected to grow at

an annual rate of 5.4% and mandates at an annual rate of 5.7%. Mutual fund growth will be fuelled by the growing middle-class client base that is saving for retirement and wealth accumulation. Mandates, on the other hand, will see growth through institutional investors such as pension funds, with the ongoing shift from pay-as-you-go pension systems to DCs. Mandates will also swell as a result of the rise of SWFs and HNWI clients, who are accumulating wealth at a fast pace.

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MUTUAL FUND CONTINUES…

Asia is one of the fastest growing and most exciting mutual fund markets. As the region’s economies have remained resilientfollowing the financial crisis, the rising middle class in countries like China, Indonesia and India is getting wealthier and isbeginning to dip its toes into the new world of investment funds. Assets under management (AuM) are rising quickly, just as salesslow in Europe.

Asia’s fund industry represents a significant growth opportunity for international asset managers, yet distribution in the regionis not straightforward. The regional market is geographically fragmented and large consumer banks dominate distribution in somecountries. Fund investors’ preferences vary from one country to another and the local regulatory approach is still evolving. As a result, assetmanagers distributing in the region need to tailor their approaches to specific markets and remain sensitive to regulatory changes.

Even so, the long-term prospects for Asia’s mutual fund growth look promising. While Asia is home to approximately 60% of the world’s population, Asian investors’ investments only account for 13% of the mutual fund industry’s global AuM, compared to 52% in the Americas and 35% in Europe, according to PwC research. Comparisons of fund AuM to local gross domestic product (GDP) (see table) tell a similar storyof low investment. This low penetration means that there is ample opportunity for growth as Asia’s middle classes become wealthier.

AuM as a proportion of GDP22

MUTUAL FUND CONTINUES…

UCITS account for most sales

Although asset managers can only sell funds directly to retail investors in established markets such as Singapore, Hong Kong and Taiwan, Europe’s Units in Collective Investments in Transferable Securities (UCITS) funds account for most of the fund sales in these markets. In emerging markets such as Malaysia, Korea and Thailand, offshore funds can only be sold through feeder fund structures or wrapped products. In other markets such as China, India and Indonesia, full distribution of offshore funds is currently not permissible.

The number of UCITS funds registered for sale in Asia is increasing quickly. As at December 2011, 5,614 UCITS’ funds were registered for sale, up from 5,434 in December 2010. Singapore accounted for approximately 2,125 of these funds, and Hong Kong for a further 1,240.

The success of UCITS funds in Asia is a phenomenon of the past ten years. Both the tireless efforts of the European fund industry in promoting the UCITS brand and the signing of memorandums of understanding with the key Asian regulators have opened the doors to cross border distribution outside of the EU.

But Asia’s fragmented geography means that distribution practices vary from one country to another, making distribution across the region expensive. What’s more, large consumer banking platforms dominate distribution in some countries. Sales charges and trailer fees paid to the distributor banks take a hefty chunk out of the fees generated by asset managers, making the cost of distribution higher than that in Europe or the US. This cost is ultimately passed on to the end-investor either as a sales commission, or through higher expense ratios.

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MUTUAL FUND CONTINUES…

Region of Distribution

Total Registrations Dec 2009

Total Registrations Dec 2010

Total Registrations Dec 2011

# new registrations over the period

Europe 49956 54441 57650 3209

Asia Pacific 5307 5434 5614 180

Americas 2154 1922 1775 -147

Middle East 894 797 640 -157

Africa 233 218 252 34

Total 58544 62812 65931 3119

Country N Of domestic funds q4 2011 N of foreign x-border funds notified for sale q4 2011

% foreign funds

China 913 n/a Not Permitted

Hong Kong 233 1240 84%

Japan 4176 89 2%

Macau n/a 955 n/a

Singapore 558 2125 79%

South Korea 9485 280 3%

Taiwan 613 855 58%

Domestic Vs Cross-Border Fund Registrations

Regional UCITS Fund Registrations

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ASSET MANAGEMENT INDUSTRY – KEY CHALLENGES

There are significantopportunities for assetmanagers ahead. However,there are also cloudslooming in the future.Alongside rising assets,there will be rising costs.The costs of assetmanagement will continueto soar as they have inrecent years and margins in2020 may be no higher– andmay well be lower – than inthe current Post-financialcrisis era. Profits today arestill 15% 20% below theirpre-crisis highs – accordingto industry analysis – and itis debateable whether theywill have reattained theselevels by 2020.

•The costs of responding, and complying with, regulation may plateau, but will likely remain high by historical measures.

•Commercial cost pressures will also rise as firms grow their distribution networks and product manufacturing capabilities to take advantage of increased opportunity, particularly in SAAAME regions.

•Fees earned by asset managers will be under continued pressure amid the ongoing push for greater transparency and comparability from investors as well as scrutiny from policymakers and regulators.

•Investment in technology and data management will also need to be maintained or increased to maximize distribution opportunities, or to benefit from new opportunities offered by new technologies and social networks, and to cope with the rigours of regulation and reporting.

•New entrants to the AM industry from other sectors could disrupt a structure that has existed largely, unchanged, for several decades.

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ASSET MANAGEMENT INDUSTRY – 2020

•Asset management has long been in the shadows of its cousins in the banking and insurance industries. By 2020, it will have emerged definitively from their shadows.

•The asset management industry needs to further develop trust within the broader community and this starts with ensuring this community understands what asset management stands for and how it works, as well as the duty of care it practices on behalf of investors.

•By 2020, four distinct regional fund distribution blocks will have formed which will allow products to be sold pan-regionally. These are: North Asia, South Asia, Latin America and Europe. As these blocks form and strengthen, they will develop regulatory and trade linkages with each other, which will transform the way that asset managers view distribution channels.

There will be far greater regulatory integration within the Greater China bloc including China, Hong Kong and Taiwan. The Hong Kong–China mutual recognition will be fully established and the framework will have been adjusted to enable flexible product with retail distribution from Hong Kong into China. Taiwan will also have joined the link-up. In South-East Asia, the ASEAN countries’ efforts to create a structure that allows recognition of mutual funds in all countries of the region will be well-established by 2020. The original ASEAN platform of Singapore, Thailand and Malaysia will now include Indonesia, the Philippines and Vietnam, all emerging countries with large numbers of wealthy middle-class investors.

Both the North Asia and South Asia regions will, by 2020, have created initiatives that facilitate cross-selling of investment funds. The APEC Asia Funds Passport initiative will be in existence, with the first fund launched in 2016 by the founding members – Australia, New Zealand, Singapore and Korea. By 2020, other countries such as Japan will have come into the fold. As a result, the regional cross-border fund passporting regimes will by 2020 have started to enter interregional bilateral agreements, paving the way for an integrated passport at a quasi-global level and allowing asset managers to distribute products across Asia.

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ASSET MANAGEMENT INDUSTRY – 2020 CONTINUES..

Global AuM to exceed $100 trillion by 2020

The Global Financial Crisis (GFC) of 2008–2009 was a major economic event affecting millions of people, but only led to a temporary detour in the long-term growth path for assets managed by the industry. They have continued to rise and today, worldwide assets under management (AuM) total $63.9 trillion. Predictions are that this will rise to around $101.7 trillion by 2020, a compound growth rate of nearly 6%.

As global economies become increasingly integrated and interdependent, regional AuM is influenced by GDP growth in other regions. For example, changes in AuM in China can be caused by changes in US GDP. Therefore looking at the impact of GDP growth in strong economies such as the US when forecasting regional AuM.

There has been a rapid accumulation of foreign assets by many of these SWFs, particularly by oil-exporting and some Asian nations, thanks to high oil prices, financial globalisation and sustained large global imbalances. This trend is set to continue over the next decade. As a result, the size of SWFs is rising fast and their presence in international capital markets is becoming more prominent. SWFs’ AuM are currently above $5 trillion and are set to surge to nearly $9 trillion by 2020.

SWFs based in the Middle East and Africa will grow the fastest, with Asia Pacific also seeing a rapid rise in SWF assets.

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KEY MARKET TRENDS AND RECOMMENDATIONS

While traditional actively managed core assets grew in 2012, general believe is that this asset class will remain vulnerable to the market’s evolution. Managers need a long time strategy that anticipates those changes.

• The continuing fast growth of solutions & specialties confirms a structural shift in the market. The advance of these asset classes will continue to outpace the growth and squeeze the market share of traditional actively managed core assets. Traditional managers hoping to surf these new flows successfully should be ready to face fundamental decisions about how to participate and what capabilities to develop.

• The most successful managers in every region are either specialists or traditional providers who have become ambidextrous that is they have maintained their active core asset business while also developing capabilities to capture new faster growth assets. For traditional players, investment in specialties, multi asset skills, or specific services will be a key to participating in the new faster-growth flows.

• Cost discipline has become an increasingly important focus since the crisis. Although efficiency gains in basis points from 2007 through 2012 were largely driven by the growth of asset values, managers are now more actively managing their cost structure.

• The operating model is a growing source of strategic advantage. For many managers an aggressive operating-model review will be required to realize their growth ambitions. Operations and IT have been largely bypassed in asset managers’ efficiency campaigns, which usually focus on other corporate and front-office functions. That is a costly lapse, strategically as well as financially. Reviewing their operating model – beyond boosting efficiency – is the key to flexibility, scalability and future growth.

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