First person: Investment dangers
By 2050, assets under management will rise to $400trn, dwarfing the banking system. But that brings with it potential problems. the Review columnist Anthony Hilton examines the outlook
Big numbersAt the end of World War II, assets under management (AUM) in the US were the equivalent of roughly half the country’s GDP. Today, that figure is five times higher – and GDP is of course also significantly larger. In the UK, however, the same growth has occurred much more rapidly.
Today, AUM in the UK is also five times GDP, but that upward charge began only in 1980.
This adds up to big numbers. In a speech last year, the Bank of England’s Chief Economist Andrew Haldane, quoting figures compiled by TheCityUK, the financial services lobbying group, said that the global total of AUM was $87trn in 2013. This was the equivalent of roughly three-quarters of the assets in the global banking system and represented a doubling in the last decade.
The forecasts are even more startling. Research by PwC, the business services group, suggests that the $87trn of global AUM will have expanded to $100trn in five years’ time. Given that AUM has correlated closely with the growth of GDP, those forecasts imply that by 2050, AUM worldwide will have risen to at least $400trn, and be at a level which dwarfs the banking system.
Potential problemsHowever, growth on this scale brings with it potential problems. As the asset management industry has grown, it has also changed in nature.
There has, for example, been a major shift towards specialist investment houses on the one hand and passive investing on the other. Hedge funds spring to mind in the specialist space, and passive investing has developed apace too – particularly with the popularity of exchange-traded funds, which allow private investors access to index-based strategies. The second significant change is the way in which the search for higher returns has led investors to ever more illiquid markets – be they emerging-market junk bonds or unquoted funds specialising in the purchase of distressed debt.
The third major trend has been the shifting of the investment risk away from financial institutions like insurance companies and pension funds and into the hands of the end investor.
It is the authorities’ view that although fund management groups have rarely been thought of as a source of systemic risk in the past, that may need to change, and they fear that if panicked end investors all sought to sell their holdings at once, the asset management industry would be unable to liquidate the underlying investments quickly and easily, thereby causing a further circle of panic reminiscent of a bank run.
Mark Carney’s warningMark Carney, though best known in the UK as Governor of the Bank of England, is also Chair of the Financial Stability Board, the global organisation set up by the G20 after the financial crash to put in place global safeguards to ensure that it would not happen again. In a letter to world leaders just this April, in which he outlined the work agenda for the next G20 meeting (scheduled for this November in Turkey), he wrote in the context of bond market investment that sudden shifts in portfolios could cause sharp and damaging spikes in interest rates. So, he said, his organisation would consider “whether additional policy tools should be applied to asset managers according to the activities they undertake, with the aim of mitigating systemic risks”.
That seems a pretty clear warning that the industry needs to brace itself. Regulation is coming.
Anthony Hilton is the award-winning former City Editor of The Times and the London Evening Standard.
The original version of this article was published in the June 2015 print edition of the Review.