When will Google and Amazon move into funds space?

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 Management 2019 - Will These ‘20s Roar? suggested 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 management”.

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 management firms will be paramount for companies to remain profitable.

“To keep the profits coming, asset managers must adjust to major changes during the 2020s,” the report said.

“The coming decade will be about meeting evolving customer expectations related to technology, preparing for the possibility of asymmetric competition, and adjusting to the emergence of China (and probably others) as a major asset management market. The 2020s will be a new world, and strategies that set asset managers up for success 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. The first path will be to operate as a boutique alpha shop - as a small, focused company that concentrates on investment performance. The second path will be to operate as a distribution powerhouse, amassing scale and maintaining advantaged access to customers. These two paths to success are already visible but we think their outlines will come into even sharper focus in the next few years.”

The “many” asset managers that do not fall into these two categories will “struggle 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 expertise and direct-to-consumer marketing prowess goes well beyond what even the biggest and best-resourced asset managers 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 reputation means that consumers “might readily trust a ‘mutual funds sold by Amazon’ offering”, with the prospect of reviews enabling them to quickly indentify a suitable provider.

“In China, Alibaba has made a successful move into the industry through its subsidiary Ant Financial Service, offering 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 whether 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 continental Europe, and will attract more flows than the US over the next decade.

“Regulatory changes are starting to open up the previously restricted Chinese 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.

“The idea of a risk-adjusted return remains somewhat foreign in China; risk management is still a back-office function. Their investment and risk management experience may give foreign asset managers an advantage in winning the institutional business of Chinese pension funds, banks, and insurers.

“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 industry, including exchange-traded funds and excluding money market funds.”