EY ITEM Club Forecast: Outlook for Financial Services Winter 2014

Forecast for Asset Management

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Solid growth is forecast for asset managers with AUMs expected to exceed £1t by 2017. Equity funds are expected to rise 7.4% in 2014, and multi-asset funds should overtake bond fund AUMs by 2015. The upturn in the property sector has rekindled investors’ interest and property AUMs are expected to grow 7.7% a year over 2014–17.

“Growing risk appetite and a steady flow of good economic news mean that asset managers continue to ride a tide of rising equity markets. Firms are capitalizing on this stability to pursue a range of goals, including greater operational efficiency, improved client service, stronger digital distribution and international expansion.”
Gillian Lofts
Partner, UK Asset Management
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EY - Gillian Lofts
Gillian Lofts
Partner,
UK Asset
Management

Growing risk appetite and a steady flow of good economic news mean that asset managers continue to ride a tide of rising equity markets. Firms are capitalizing on this stability to pursue a range of goals, including greater operational efficiency, improved client service, stronger digital distribution and international expansion.

But despite this rosy picture, there is increasing recognition that asset managers cannot rely on equity growth forever. Economic recovery may allow further valuation gains, but a lot has already been priced in. And the improving outlook is only bringing higher base rates – and lower bond valuations – closer.

In their search for alternatives to equity and fixed income, asset managers are increasingly turning their attention to the real economy. Real economy assets not only provide portfolio diversification but also offer a range of possibilities to managers searching for alternative sources of income or new opportunities for alpha. Commercial lending is one area of interest. Asset managers are developing their credit capabilities, with many already stepping in to fill the space left by capital constrained banks. Real assets, in the shape of property and infrastructure, are another major area of focus.  ↓ [... more]

Of course, these new asset classes are not without their challenges. One of the greatest is illiquidity, a risk that many firms are unused to and one that needs to be factored into overall assessments of investment risk. More direct involvement in SME finance and real assets is also taking many asset managers into uncharted social and political territory, leading to a need for stronger governance and reputational risk management.

Even so, investing in direct lending and real assets is more than just a growth opportunity for asset managers. It gives the industry a chance to play a larger role in stimulating business investment and job creation. That in turn will help firms to rebuild public trust and play a greater and more sustainable role in the wider economy.

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Asset management highlights:

  • Total UK-focussed assets under management (AUMs) are expected to rise by 6.5% a year over 2014–17 and exceed £1t by 2017.
  • With GDP growth expected to be above 2% in 2014, we expect risk appetite to improve and forecast a 7.4% rise in equity fund AUMs this year, reaching £466b.
  • We estimate that multi-asset funds will edge ahead of bonds in 2014. We forecast that by 2015, multi-asset AUMs will reach £149b, exceeding bond fund AUMS by £14b.
  • Property funds currently represent a small asset class, but the upturn in the property sector has rekindled investors’ interest. We expect property AUMs to grow 7.7% a year over 2014–17.