On October 26-27, 2024, the Global Wealth Management Forum 2024 Shanghai Suhe Bay Conference was held in Shanghai. Michael Levin, Head of Morgan Stanley Investment Management in Asia, shared insights on the development trends of the financial industry under global market volatility.

Levin stated that the opening of China's capital market is the most significant industry trend he has experienced in his lifetime. In 2001, China joined the World Trade Organization and began implementing the Qualified Foreign Institutional Investor (QFII) system in 2002, followed by the interconnectivity of stock and bond markets. In just over two decades, China's capital market has undergone a dramatic transformation and has now become the world's second-largest market. The market value of China's stocks was approximately $460 billion in 2002 and has now reached nearly $12 trillion, about 26 times that of 2002.

Globally, the importance of asset management and wealth management is increasing, complementing each other. Over the past decade, the scale of the asset management industry has doubled, reaching about $128 trillion, exceeding the scale of global GDP. According to McKinsey data, nearly half of the global net fund flows in 2023 came from clients in the wealth management industry. The Asian market is an increasingly important source of growth for the asset management industry.

Within the asset management industry, Levin observed the "barbell effect" in management fees. On one hand, the scale growth of passive management assets is higher than that of active management assets, and the overall management fees of public funds are declining. Passive investment allows clients to allocate index assets with higher liquidity, lower costs, and more reasonable fees, making the growth of this type of investment tool very beneficial to clients. Active management investment needs to raise the standard of responsibility to prove that its slightly higher management fees are justified. The decline in management fees, combined with increasingly high operating costs, technology investments, and increasingly strict regulatory requirements and client expectations, is causing the overall profit margins of the public market to decline.

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On the other hand, alternative assets with higher management fees have become a major source of income for the asset management industry, and their scale is also expanding rapidly. The growth of alternative assets is due to the surge in the scale of products with certain liquidity restrictions, a product structure designed to attract wealth management clients.

Since the simultaneous contraction of the stock market and fixed-income market in 2022, the scale of private markets serving wealth management clients is expected to continue to grow. Levin said that while this is a good thing from the perspective of diversifying risks, the broader investor community's understanding of liquidity risks and corresponding costs is still too low. Individual investors are very sensitive to fluctuations in the public market, in stark contrast to their perception that the private market has lower fluctuations, more stable valuations, and lower risks.

In Levin's view, if the private market's return rate looks quite attractive under the conditions of market prosperity, low leverage costs, and abundant exit options, the performance of the private market will show significant differentiation under the current limited liquidity options. If some asset management companies are weak in private equity, private credit, and real estate, their chances of losses are also high.

Helping investors cope with the changing market environment is an eternal theme of the asset management industry. In 1952, Harry Markowitz pioneered modern portfolio theory and was awarded the Nobel Prize for it. He proposed maximizing risk-adjusted returns by constructing a diversified portfolio composed of assets with low correlation. Levin believes that, essentially, the contribution of an investment to the efficiency of the portfolio is more important than its individual risk-return characteristics. As Markowitz said, "diversification is the only free lunch in investing."Although strategic diversification is the simplest and most effective way to cope with volatility, in reality, not everyone can achieve it. Faced with global market fluctuations, even professional investors may exhibit a home bias and tend to invest in asset classes that have performed best recently, rather than investing in the most promising asset classes from a forward-looking perspective.

Compared to before the global financial crisis, the overall level of market volatility has been relatively low since 2010. Due to enhanced information acquisition capabilities, improved rapid trading capabilities, and the potential for short-term fluctuations brought about by algorithmic trading, market volatility is concentrated over shorter periods.

Overall, benefiting from a richer array of investment solutions, including low-cost passive index investing, active management investing, and innovative alternative investments across asset classes, asset management companies can create diversified, more resilient, and more efficient portfolios, thereby helping investors cope with extreme market conditions.

At the same time, given that wealth management clients face more choices and more complex products, and asset management companies play an increasingly important role in helping investors achieve a decent retirement life, investor education is necessary, and it is crucial to fully consider investors' risk tolerance and liquidity needs when investing.

Looking ahead, demographic changes are a very important factor supporting the growth in size and importance of the asset management industry, although this trend is not very noticeable. With the general trend of extended life expectancy, government-funded social security programs and defined-benefit pension plans are not a long-term solution. People need to obtain more retirement security through capital investments, rather than relying solely on labor returns.

Fixed contribution pension plans that can enjoy tax benefits are another viable option to increase retirement income. The 401K and IRA plans in the United States, certain annuity plans in Australia, individual savings accounts in Japan, and China's individual tax-deferred pension plans (the third pillar of the pension system) are all good examples. Although China's individual pension plan is still in its infancy and the speed of capital absorption is slow, Milewun emphasizes that its importance is self-evident and it has a long-term outlook.