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01.08.19 14 ASSET MANAGEMENT DIGITAL giants such as Google and Amazon could start rolling out fund shops in the next few years, according to a report by Boston Consulting Group (BCG), with their digital capabilities and marketing skills far exceeding those of asset management giants. BCG's report Global Asset Manage- ment 2019 - Will ese '20s Roar? sug- gested digital powerhouses are "the wild card" in the battle emerging in the "winner-takes-all" asset management industry, as their offerings "would in some ways translate well to asset man- agement". BCG advised companies to review their strategies, capabilities and operating models as the coming decade is likely to see volatility and economic uncertainty continuing, while the implementation and use of technology in asset manage- ment firms will be paramount for com- panies to remain profitable. "To keep the profits coming, asset managers must adjust to major changes during the 2020s," the report said. "e coming decade will be about meeting evolving customer expecta- tions related to technology, preparing for the possibility of asymmetric com- petition, and adjusting to the emer- gence of China (and probably others) as a major asset management market. e 2020s will be a new world, and strate- gies that set asset managers up for suc- cess in the past may not suffice in the future." BCG's 17th annual report continued: "We see two basic paths to success for asset managers. e first path will be to operate as a boutique alpha shop - as a small, focused company that concen- trates on investment performance. e second path will be to operate as a distri- bution powerhouse, amassing scale and maintaining advantaged access to cus- tomers. ese two paths to success are already visible but we think their outlines will come into even sharper focus in the next few years." e "many" asset managers that do not fall into these two categories will "strug- gle to avoid drifting toward irrelevance", BCG added, with the trend taking hold in the US first before affecting Europe and other markets. Digital disruption Alongside these developments is the possible disruption from digital giants, the report suggested, referring to the companies whose "level of digital exper- tise and direct-to-consumer marketing prowess goes well beyond what even the biggest and best-resourced asset manag- ers can marshal". BCG suggested Google could use the consumer sentiment data it captures through its services to predict market or individual stock performance "with a new level of insight" while Amazon's rep- utation means that consumers "might readily trust a 'mutual funds sold by Am- azon' offering", with the prospect of re- views enabling them to quickly indentify a suitable provider. "In China, Alibaba has made a suc- cessful move into the industry through its subsidiary Ant Financial Service, of- fering Yu'e Bao, now the world's largest money market fund, and more recently building distribution partnerships with local and foreign asset managers," BCG added. "It is probably less a question of wheth- er other digital giants will try to grab a piece of the asset management industry than when they will - and exactly which parts of the value chain they will try to disrupt." China to amass assets Furthermore, the report said China is set to become the second-largest region for asset management, ahead of con- tinental Europe, and will attract more flows than the US over the next decade. "Regulatory changes are starting to open up the previously restricted Chi- nese market to foreign asset managers. Chinese AUM is poised to more than triple, to $14trn in 2025 from $4trn at the end of 2018, so there is every reason for foreign asset managers to attempt to participate in this immensely promising market," BCG said. "e idea of a risk-adjusted return remains somewhat foreign in China; risk management is still a back-office function. eir investment and risk management experience may give for- eign asset managers an advantage in winning the institutional business of Chinese pension funds, banks, and in- surers. "Non-Chinese asset managers may also be able to pick up share by selling passive investments, which represent only about 13% of China's total mutual fund indus- try, including exchange-traded funds and excluding money market funds." China is set to become the second-largest region for asset management, ahead of continental Europe, and will aract more flows than the US over the next decade When will Google and Amazon move into funds space?