Author: Angie Lin, Co-founder and President of FinEX Asia
(The original article was published in the Taiwan Banker Magazine January 2019 issue)
The global asset management industry is facing major reforms. Changes in the investment environment such as market's volatility due to uncertainties, growingly stringent regulations, continuous changes in investors’ preferences, and digitalization brought by technology, have all intensified the new business competition faced by the asset management industry. In order to keep up with these changes and gain an edge, asset management companies are, in recent years (especially this year), most often plagued with the conundrums regarding the type of obstacles required to be overcome, as well as the type of development plans required to be prioritized with the view to improving returns and appealing to more investors amid the complex market environment today. This article aims to share with you our observations on the current situation and future development of the asset management industry in Asia, as well as explaining why technology is one of the sought-after solutions for the industry.
Going digital has become a vital factor for competitiveness in the Asian market
According to McKinsey's "Performance Lens Global Asset Management Survey for 2017", in order to gain the advantage of asset under management (AUM) growth and operating profit increase, many international asset management companies have in recent years invested a substantial amount of resources mainly in the following areas: 1. Product manufacturing ability – local yet diversified, 2. Talent management and cultivation ability, and 3. Digitalization.
These capabilities are particularly important for asset management companies in Asia, primarily because of the uniqueness of the Asian market, which is different from that of the European and American markets. Due to market diversities, the composition of Asian investors tends to be more diversified. Apart from traditional pension funds and insurance funds, major source of AUM in Asia also include retail investors and high-net-worth (HNW) investors. Unlike European and American markets where pension funds and insurance funds are the major asset owners, individual investors in Asia also have significant roles in the asset management industry. Therefore, the avenue to provide suitable products to Asian investors has become an indicator of how competitive these large asset management companies are in Asia. Another unique feature of the Asian market is the growth rate of AUM from HNW individuals. In the past six years (2011-2016), Asian assets have recorded a staggering growth.
As a result, the rapidly amassed “new wealth” from Asian emerging markets have driven the growth of the AUM of Asian asset management companies in the past 10 years (2008-2017). These HNW investors do not enjoy passive management, but instead they have a higher trust in management’s ability through active management, with investment yield as their main consideration. This also explains why as high as 75% of AUM in Asia are under active management, where up to 57% in North America and 28% in Europe are under passive management. It also explained why investors in Asia, where asset managers deem investment returns as their main consideration, favor multi-asset investment products. In fact, there has been a growing demand for alternative investment strategies in 2017/2018 investment.
Technology can optimize investment products and operation efficiency
Asset management companies are utilizing new techniques and technologies to enhance their ability to offer new products and improve business performance. These improvements include enhancing system efficiency, reducing long-term costs, driving revenue growth and improving investment performance. The expectations and investment in technology of large asset management companies are no longer limited to internal operation optimization. Instead, asset managers' enthusiasm for technology investment is directed towards having significant performance improvements in portfolio management, sales, and back office management. Therefore, both data and artificial intelligence ("AI") are major technological capabilities focused and invested upon by asset management companies.
However, there are misconceptions that, with the adoption of technology, asset managers may be replaced by machines. In fact, this is not the case. Technology is to provide more powerful support enabling asset managers to achieve higher return and better risk management.Take US consumer credit as an example, with the development of AI, risk assessment can be conducted more thoroughly. This is demonstrated in the fact that AI can be used to dig deep into the hundreds of thousands of data attributes from personal credit bureau and big data to determine credit character of individuals and industries at a reasonable cost, as well as summarizing a number of loan evaluation benchmarks, compared to more than ten commonly used evaluation benchmarks of traditional banks.
Besides, AI can simulate the mindset of loan managers and make judgments based on personal credit records and big data. As a result, the rating parameters can more accurately reflect the financial status of every borrower, and borrowers’ risk assessment can be conducted more precisely.
The key for technology to transform asset management is that machines are capable of self-learning. The machine learning process is the practice of using complex algorithms to enable the AI model to parse a sea volume of data, learn from it, map out and optimize hidden structures and eventually, make a prediction or determination. As a result, the AI model can now predict consumption behavior and credit risks of overdue payment. With this information in procession, the model can therefore provide more relevant product recommendations to the customers, or more accurate evaluations on the risk premium of the borrowers to the Chief Risk Officer.
Driven by the digital and technology boom of the past decade, we can expect that Fintech will make services more user-oriented than traditional ones, and that the quality will be better and more inclusive.