The group has added its voice to a chorus of organisations predicting that the rise of "passive" investing spells pressure and consolidation for the asset management world.

There will be more consolidation in Asia’s asset management industry in 2018 as margin pressures caused by low-cost index funds and fee compression bites, but overall the sector should prosper amid improved economic conditions, a report by Cerulli Associates, the analytics and research firm, says.

The asset management industry is ripe for further consolidation in 2018 as scale becomes increasingly important. The growing challenge posed by the rise of passive strategies and pressure on fees will continue to be key drivers of merger and acquisition deals this year,” the organisation said in a regular overview of the industry.

“Those acquiring deals in these next few years are likely to be more strategic buyers as they seek to expand their capabilities in areas such as passive investments and alternative strategies. This will drive up deal valuations, which may make selling attractive to some fund managers,” it said.

Cerulli is joined by a number of other organisations predicting M&A in asset management, citing the rise of so-called passive products as a factor. Such “passive” products, as with exchange traded funds, typically charge fees far below those of actively managed portfolios. ETFs have gained ground for a variety of reasons, such as how regulatory crackdowns on use of trail commissions to advisors have encouraged advisors to use cheaper investment tools. Also, disillusion with results of actively managed funds, perceived as an inability to persistently create “alpha” over time, hit some fund firms’ business models. The rise of the internet and new platforms has also intensified price competition between investment houses. Moody’s, the ratings agency, has cut the outlook on the world’s asset management sector.

Against such a background, businesses have restructured to make “passive” products more of a central offering, such as US-listed BlackRock, the world’s largest listed asset manager, or seen their fortunes boom because of their index-tracking approach, as in the case of Vanguard, another major US house.

Rising
Cerulli said that the asset management sector in Asia entered 2018 with the tailwind of a strong market from the previous year. By the end of December, the MSCI All Country Asia Pacific Index hit 28.7 per cent in returns, outperforming the MSCI All Country World Index's 21.6 per cent return. In Asia ex-Japan, Hong Kong topped the region with 36.0 per cent in returns as of December, followed by India (27.9 per cent) and China (21.8 per cent).

“Robust growth” should boost growth-sensitive assets this year, Cerulli said, citing International Monetary Fund forecasts of 3.7 per cent in global growth and 2.5 per cent expansion in the US, 6.4 per cent in China, and 0.9 per cent.

“Cerulli expects to see an increase in risk appetite in some markets, and more managers and distributors making a bigger push for equity funds than what we saw the previous year,” it continued. 
The organisation noted that last year there was a preference for bonds in a number of Asia ex-Japan markets, as well as in Australia, despite efforts by distributors in markets such as Singapore and Hong Kong to promote equity funds to investors. 

Across Asia ex-Japan, bond funds recorded the second-strongest net new flows at $49 billion after money market funds, and the third-largest assets under management at $699.7 billion after money market and balanced funds, as of September 2017.