Millennial participation is expected drive both challenges and opportunities in the industry.
The survey cited changing savings habits as a significant driver in asset managers’ expectations for AUM and fee income growth, and also found growing appetite for ESG and impact investing. The rise of Millennials among the investor cohort may be behind both these trends. In this section we look at other research findings beyond our survey that provides insight into the dynamics of Millennial investors.
First the challenge: typically Millennials save less than previous generations. Some of this is practical: living costs as a percentage of average income are higher than for previous generations during their early working careers, therefore they have less disposable income to allocate to investment plans.
However, research also suggests that AUM growth could be challenged by Millennials’ attitudes to saving. There is evidence that they place a lower priority on long-term savings than workers in previous decades. A large part of this is probably due to the fact that Millennials typically change jobs more frequently than generations in the past. It’s not clear how much of this is down to Millennials’ desire for worker flexibility and how much is due to changing corporate practices, such as less valuable pension arrangements, but what is clear is that private pension AUM is falling from workers of this age – and other types of saving are also falling.
While Millennials pose a structural challenge to AUM growth there are some positive aspects for the industry. The most obvious is the increasing importance of Environmental, Social and Governance (ESG) investments that these individuals as a group are driving. ESG investments are those that meet certain ethical and sustainability standards. According to a recent Morgan Stanley survey, 84% of Millennials cite investing with a focus on ESG impact as a central goal.
Millennials may be driving the growth of ESG products, but there is also growing demand for these investments from other age groups. According to one asset manager, Pictet Asset Management, the compound annual growth rate of all ESG assets as a share of global AUM is 15.5%. At the launch of the report, Luca Paolini, Pictet’s chief strategist, said that ESG is clearly “the next big thing” for fund management, and that its market share gains are similar to those of passive investing a decade ago.
A related area is impact investing, a term that refers to investments made into companies or organizations that generate a measurable, beneficial social or environmental impact alongside a financial return. By definition these are active management styles and the social good component is not mutually exclusive from healthy returns. There are many impact investments that can generate private-equity style returns (though by no means all), and management and performance fees can be attractive for asset managers looking to develop new ways to capture AUM.
According to an industry report published by the Global Steering Group for Impact Investing (GSG) the impact investment market is expected to grow from about $138 billion in 2015, with AUM purely through private impact investors, to $307 billion by 2020 – implying a CAGR of 17.3%.
When combined, ESG and impact investing offer strong sources of both AUM and profitability and respondents are clear in anticipating the opportunities the present for asset managers who embrace this Millennial-driven trend. However, this macro outlook is complicated by an anticipated behavioral change from Millennial savers that could become a significant issue for asset management as this generation becomes an increasingly important source of new AUM.
