I will live to the age of 85 and my wife will live to the age of 89 – or we will if our life expectancy meets the UK national average. Life expectancy has increased 10 years for men and eight years for women over the past 50 years. This is good news for both me and my wife, who are more likely to enjoy a longer life of better quality in our declining years than our parents and grandparents.
But what is sometimes forgotten amid all the noise over the pressure of longevity on the public purse and the ability of people to afford a comfortable retirement as their pension pots are stretched, is that increasing life expectancy is good news for the asset management industry too. As people live and work longer, they are more likely to need an asset manager to help them with their stocks and bond selections. In theory, this means more fees and bigger profit margins for investment groups.
It has to be stressed that an older population, where there are more non-working pensioners, may act as a drag on economic growth. You only have to look to Japan, where there are reportedly more elderly citizens than anywhere else in the world, to see how demography can lead to economic stagnation. But, putting Japan and its savings’ culture aside, an ageing population should work in favour of asset managers as we continue to invest long into our old age. A wealthier world, where there are more millionaires than ever before (14m millionaire households globally) and where private wealth has risen to $135tn, should also help.
This, therefore, leads to an interesting strategic question for the industry. Should fund managers concentrate more on building up their retail operations, catering for the growing number of wealthy individuals, at the expense of their institutional business, which manages money for insurance groups and pension funds? The answer for some groups is unequivocal: yes.
Henderson Global Investors has attracted more retail customers in the past five years as it has focused on delivering so-called solutions for clients, which means providing a certain outcome in terms of annual yield or capital return. This has gone down well with institutional as well as retail customers, but it has proved particularly popular with wealthy individuals. Henderson has a current ratio of 50:50 in terms of money it manages for institutional clients versus retail, compared with 80:20 in favour of institutional five years ago.
Ashmore, the fund manager focused on emerging markets, has doubled the value of its retail business in the past five years, using its expertise to attract more wealthy individuals in Europe and the US who want to invest in emerging markets.
Aberdeen Asset Management has more retail customers too.
The institutional side of the business should also benefit from an ageing population. As people create more wealth through living and working longer, some will channel their extra money into personal pensions under the retail asset management umbrella, while others will bolster their corporate pensions through extra contributions on the institutional side.
Perhaps more significantly, an ageing population raises an intriguing question on asset allocation. Will it boost equities over bonds, or vice versa? Now that I am likely to live to the ripe old age of 85, will I decide to put more of my money into equities, which tend to deliver higher returns at the cost of extra risk, the so-called equity risk premium? This might make sense as I am living and working longer as pension age rises and have more time to recoup my losses should the market go against me. Conversely, I could grow increasingly conservative and opt for bonds.
Making the right judgment on equity risk premium is more important than ever for asset managers, irrespective of whether that is on either the retail or institutional side.