Key drivers include ongoing development of the Greater Bay Area, technological advancements, post-retirement products and ESG investing
Hong Kong’s fund management industry sees a positive outlook over the next five years, with 53 percent of survey respondents expecting growth of 11% to 30% in total AUM of their own business by 2025, despite potential challenges, according to a joint report by KPMG and the Hong Kong Investment Funds Association (HKIFA).
The report, titled Vision 2025: The future of Hong Kong’s fund management industry, analyses the long-term outlook for the industry, based on a survey of HKIFA member institutions as well as in-depth interviews with senior industry executives. The survey finds that the opening up of mainland China’s asset management industry, the ongoing development of the Greater Bay Area (GBA), technology-driven change and environmental, social and governance (ESG) investing will be the main growth drivers.
The survey respondents identified the top five trends that are likely to have the biggest impact on Hong Kong’s fund management industry by 2025, namely regulatory change, fee pressure, the rise of the Greater Bay Area as a financial centre, an ageing population, and increasing connectivity, in that order.
Andrew Weir, Global Head of Asset Management and Vice-Chairman of KPMG China, said: “Hong Kong continues to be viewed as a leading asset management centre. Close collaboration and active engagement between industry stakeholders is key in order to take the sector to the next level. The ability to capitalise on the significant opportunities related to the development of mainland China, technology and ESG will drive growth in the coming years and maintain Hong Kong’s position as a leading regional and global asset management hub.”
Bruno Lee, Chairman of the HKIFA, said: “To address Hong Kong’s ageing population retirement needs, the ultimate solution the industry is trying to deliver is to help people understand what they will need to invest today versus what they want as income in the future. The uncomfortable truth is that people do not want to take risks but everybody wants better return, so more education is needed to help investors realise and understand that there is always a trade-off between risk and return. Ultimately, increasing people’s engagement with their pension scheme will help them to better understand their post-retirement options and their current saving requirements based on their future spending needs.”
Looking at the next five years, respondents named ‘capital market development’, ‘renminbi liberalisation’ and the ‘ongoing development of the GBA’ as specific mainland China developments that are expected to have the biggest impact on Hong Kong’s investment management industry. Many are optimistic that the significant uptick they have seen in China-originated AUM since 2015 will accelerate. One in three respondents expect their total AUM originating from the mainland China market to grow by more than 30% by 2025.
Bonn Liu, Partner, Head of Asset Management, ASPAC, KPMG China: “There is a need for the industry to develop attractive long-term income-paying products for post-retirement. Hong Kong has a significant pension challenge and solving the post-retirement and pensions problem will require joint action from all relevant stakeholders, including players in the industry, regulators, government employers and employees.”
Most of the respondents also agree that as a key hub for asset management, Hong Kong has a significant opportunity to leverage its advantages within the GBA, which accounts for 12% of China’s GDP. While at present, a majority of respondents (79%) do not yet have a plan for the GBA, this is set to change as 37% of all respondents said they plan to formulate a strategy for the area in the next 12 months, in addition to the 21% of respondents who say they already have a strategy.
Interviewees believe that in 2025 technology will be more focused on supporting the industry – achieving efficiencies and making it easier for clients to invest. Nearly 80% of respondents expect their investment in technology to increase in the next 12 months, with a significant number (37%) expecting this investment to increase by more than 10%. It is also reflected in the areas the investment is earmarked to go, with 20.8% to be put towards client-facing technology such as digital client interfaces, improved websites and apps. The largest proportion (22.3%), however, is expected to go towards data. Effectively harnessing the power of data will facilitate better management decisions in near real-time.
Vivian Chui, Partner, Head of Securities & Asset Management, Hong Kong, KPMG China, said: “Asset managers that are thinking about focusing on creating direct customer channels will need to fully understand how to leverage data from and about their customers. The fund houses that are able to differentiate themselves from their competitors will be the ones that are able to build a strong brand that stands for high quality products and integrity, offer a great user experience, and focus on education in formats that are understandable to the investor.”
In recent years, asset managers have also faced increased demands to integrate ESG into their investment decisions and to offer more sustainability-related products with 89% of respondents saying they ‘agree’ or ‘strongly agree’ that providing sustainable investing-related products is increasingly important to clients. Respondents however vary on their views related to the likely proportion of AUM of their investment in ESG products by 2025. Eighty-four percent expect the proportion to be more than 5%, with just over a quarter (26%) of all respondents expecting a proportion of more than 25%.
The greater focus on ESG investing will necessitate asset managers to find the right talent to lead and support their ESG initiatives. Survey respondents, however, expect there to be a shortage of skilled ESG specialists; this ranks first in terms of greatest skill shortages expected in Hong Kong among fund managers surveyed.