Okay, good morning, everyone. Thank you for taking the time to join us today on our webinar. Today we are privileged to have Heike, who is based in Sydney, who looks after the wealth management team's research. Today she'll be walking us through some asset allocation trends. This is with a particular focus on the APAC region and how these forces are reshaping portfolios. I'll definitely encourage any of you to ask any questions during this webinar with the Q&A button located at the bottom.
Any questions that we might not be able to get to, we will get back to you on those afterwards. The recording and the slides will be shared afterwards as well. Without further ado, I'll pass the time on over to Heike. Over to you, Heike.
Thank you, Irene. Yeah, welcome everybody. Like Irene said, my name is Heike. I'm part of the wealth management team here in Sydney or out of the banking and payments team. Yeah, today's presentation will be on asset allocation trends in the Asia Pacific region. The main focus is Asia Pacific, if there's any data points you are interested in from a specific country or global data points, please feel free to reach out to either myself or to Irene later on. Okay, getting started straight away. Today's agenda, I wanna talk about the current investment environment first of all. I will be going on to talk about more specific trends and investment preferences, after that, I will be focusing on the high- net- worth space, the last section will be about targeting.
Okay, investment environment. Just setting the scene here really, I think the biggest theme we are seeing at the moment and a big part of this presentation will be geopolitical risk, geopolitical uncertainty. It's really the backdrop to a lot of what we are seeing in asset allocation at the moment. As you can see, geopolitical risk, it's really high, but it's also coming through in much more frequent and sharper spikes. You can see it never really quite goes away, but every flashpoint, like be it, the Russia-Ukraine War, the Gaza escalation, or more recent concerns in Iran, it really brings it back up. For wealth managers, it really matters in two ways.
First of all, you've got portfolio construction, of course, and clients are much more aware of concentration risk about energy shocks, and they are much more open to including diversifiers in their portfolio, but they are also much more open to holding much more dry powder. Secondly, and it's probably equally important, we've got the communication issue. In periods like this, clients really wanna know that changes are not just happening in the background. They wanna be sure that somebody's really paying attention, that there's a plan in place. The challenge for firms is not to react dramatically to every headline because it normally creates just more noise than doing anything good. It's being there, monitoring risk properly and explaining what matters and what doesn't matter and communicating that in a clear way. Just highlighting my point here again.
In 2025, 68% of wealth managers in Asia Pacific agreed that geopolitical risks are much more important drivers of asset allocation decisions than economic ones. Two years prior, in 2023, that proportion was 57%. Obviously, that's got an effect on markets, but also on risk sentiment. What you can see here is retail investment holdings growth. You've got the past three years and the coming three years. The x-axis is a forecast, and then you've got historic data on the y-axis. This is where uncertainty really starts to show up in actual investor behavior. Risk assets, they are still growing. It's not a full retreat from markets. But growth, it's really slowing down across equities, bonds, mutual funds, and ETFs.
On the flip side, you've got deposits, where we are seeing higher growth than in the past three years. It's really because investors are looking for safety. They are becoming more cautious, they are becoming more liquidity focused, and they are also becoming much more selective where they're really taking risk. Here, following on from the previous slide about growing uncertainty and retail investment growth, this one here shows the next effect coming through in overall liquid wealth growth. The main story here is one of moderation. Growth, it is still there, but it's becoming weaker across the market. This really fits in with that more volatile backdrop and less support from risk assets, greater volatility.
The high-net-worth segment, that's the really blue one, that stands out, it's much more resilient because it's typically better diversified. They are less forced to de-risk, they are better able to capitalize on opportunities should any arise. The lower affluent segments, on the other hand, they are much more constrained by inflation pressures and cash flow pressures, it means growth is expected to visibly slow down over the coming years. Moving on to investment preferences, I really do like that slide here because it puts the recent caution we just talked about, it puts it into context, into a longer- term context. Though even we have that uncertainty and volatility, and it's making investors much more selective today, the broader trend in Asia Pacific actually has been one towards more market-based risk assets.
Deposits, they still remain a good chunk, though. That's a key difference to the global picture if you look over to the right. Asia Pacific, we are still moving in the same direction here, but it's much more gradual. Compared to global markets, retail investors here, they still look a bit more conservative, and they keep a larger share really in savings products. However, we are still seeing that same rotation out of deposits into market-based assets, just a bit at a slower pace. This one here, it's pretty much just a practical consequence of the uncertainty backdrop we've been discussing. When markets feel more volatile, investors are much more willing to hand over control or to actually work with professionals rather than just doing everything themselves.
You can see here, on the left, that's in Asia Pacific, level of agreement that volatility is driving uptake of managed mandates. That has increased quite a bit since 2023. It's not just really a theoretical point here. It's wealth managers themselves. They are seeing much stronger of a shift towards advice-led, towards discretionary solutions, when markets are really getting harder to navigate. The key takeaway I really wanna make here is volatility is not just a risk. It really can be an opportunity as well. When clients feel less confident, the case for a managed mandate, it's becoming much stronger. Yeah, once again, it's also raising the bar because obviously providers need to navigate that volatility, and you've got to have a communication strategy in place just to really justify these fees.
This one here, it really goes hand in hand with the previous slide as well. We are seeing a lot of demand for active ETFs, and that's really a direct result of that heightened market volatility. Recent turmoil is really driving demand for liquid, but also for actively managed solutions. In Asia Pacific, as you can see here, it's circled. 71% of wealth managers agree that investors are increasingly opting for active as opposed to passive ETFs. If you look at the data, active ETFs, they are still a relatively small segment. They are 10% of the total ETF universe. They are growing pretty quickly, though. We're seeing a big opportunity in India, Malaysia, and China especially. Flows there are coming less from less from mutual funds, though.
Sorry, less from passive ETFs. It's coming more from mutual funds, and it's mainly because they're a bit more inflexible. There's also a lot of flows going into fixed income structures at the moment in active ETFs, mainly because there's much more in terms of inefficiencies and market inefficiencies, but there's also greater need for more dynamic duration management, especially at the moment. Another trend I wanna talk about is ESG. There's been quite a lot of chatter recently that demand for ESG is subsiding. That's really not what we are seeing in our data. ESG, it's really still a big, big part of the high-net-worth portfolio, and Asia Pacific in particular, it stands out here as one of the growth markets.
We are seeing stronger regulation coming up, but also more product development and just a growing investor base, all of that is really supporting growth at the moment here in Asia Pacific. There's been a lot of political noise, especially coming from the U.S., we've seen some pushback in other segments, the high net worth markets, it's really still going strongly. We have seen a bit of a retreat in the retail space though, it's pretty much just a direct result of more challenging investment environments because investors, they are really becoming more outcome focused. You've got this greater emphasis on performance, on capital preservation, it means that ESG is becoming much more of a secondary consideration, kind of a secondary filter.
It really just means you have to show that there's no compromise between these goals. Yeah, overall, I think ESG has just become more selective rather than less relevant. Clients are really asking these harder questions, so it's just a matter for wealth managers to be able to position ESG accordingly and to really answer these questions. I wanna talk about tokenized assets now. As you can see on the left, demand, it's particularly strong in Americas, also in Asia Pacific, as tokenization, it's really moving beyond that niche digital asset theme. What makes it really relevant is not the technology itself, not only. It's the fact that it can open up access to these traditionally hard-to-access investments.
It's really bringing down some of these usual barriers like high minimums, limited access, and admin complexity. You've got investments such as private credit, real estate, or just other alternatives, which are becoming much more readily available through fractional ownership. Especially at the moment, we are seeing strong demand for that just as investors are really looking for these new means of diversification. What it really means is that the competitive edge, it's shifting because it's no longer just about providing access to these sophisticated investments. It's about doing that in a more accessible and scalable way. Moving on to the high-net-worth space.
What you can see here is that the high-net-worth portfolio in Asia Pacific, it actually has become more equity focused since the pandemic, and it's pretty much just a stronger market and a bit of FOMO mixed in there. Allocations to real estate and commodities, they've come down. Bonds have been pretty much stable, perhaps gone up a bit. If you look at the GlobalData on the right here, it's quite useful as a comparison because you can see it's not just an Asia Pacific story, it's a global story. The key takeaway is that rising equity allocations, they really have supported growth over the past few years, but it's also really increasing concentration risk.
It really means rebalancing and diversification have to become much more important, especially because AI related tech exposure, it really has been driving much of the performance, we are seeing a lot of risk there. Yeah, commodities. I feel like I do have to talk about commodities this year. They absolutely have moved back into focus. We've got increased geopolitical risk, inflation concerns, supply side uncertainties. All of this has brought commodities back as a diversifier, but also, just as, a performance driver.
Precious metals, as you can see, they've been the clear winner here, but at least if you look back over the past year or so, more recently it's been a bit of a mixed bag because we have a stronger U.S. dollar, we've got higher treasury yields, and rate cuts also seem quite unlikely anytime soon. It really means gold has become less attractive when comparing it to income generating products. Much recently, so has the energy sector obviously come out as a top performer. Having a look at the actual high net worth commodity portfolio now, I was saying before, the proportion allocated to commodities, it actually has gone downward somewhat leading up to 2025. That's when we went into the field. Since then, it would have crept up based on performance alone.
If you have a quick look, physical gold, it always used to be the number one, or in recent years, as part of the commodity portfolio. It actually is not that anymore. It has been going down a bit, that's really just because investors are looking for commodity exposure in a way that is more defensive, but it's also easy to access, rather than just relying on these complex structures or direct holdings. What we've really seen is what's highlighted here. We've seen a strong move towards ETF products. I guess my key message here is that commodity exposure, it's becoming very simple and it's becoming more liquid. Okay, that's a big one. That's the average high net worth portfolio or for alternatives in Asia Pacific, we are comparing 2024- 2025.
There's a lot going on here, but I wanna talk about four trends in particular. We've got a move away from cryptocurrencies, we've got the realization that NFTs, it's just basically a fad. We have a move into hedge funds, we've got a total explosion of private debt funds. Breaking it down, I don't wanna talk about crypto and NFTs a lot, we're in the middle of a crypto winter. Cryptocurrencies, they are very risky. Investors are just not willing to give an extremely volatile asset a large role in their portfolios, especially not at the moment. With NFTs, which you can see at the bottom, much of the earlier hype was really tied to novelty, to media attention.
We also have a lot of the underlying assets that were just much more risky than initially assumed. As you can see, it has really gone down to 1% of the average high net worth portfolio, alternative portfolio. If you look at this at the entire portfolio, it's really marginal. If you go to hedge funds, I've talked about this before, investors are really looking for more active management, and it really has propelled demand for hedge funds. Hedge funds actually had a really good year, the best year since 2009, and the strongest inflows since 2007. They had inflows of GBP 116 billion in net investor inflows. Looking forward, we really expect this trend to continue because volatility is not likely to subside anytime soon.
At last, I wanna talk about private debt funds. It has been in the media a lot as well. Asset managers really have been increasingly targeting private investors, and there's actually been a lot of demand because you've got higher income, and then the market also looked much more insulated than public credit. Yeah, there's been a lot of concerns recently about portfolio quality, especially to software lending because we are seeing a lot of disruption, obviously, from AI. Most of you would remember the BlackRock example which had to limit withdrawals. Our take is that it will slow down. We will see less inflows.
The main thing, the main takeaway is that we will have a higher focus on quality managers in the private debt space, and investors will be looking for structures with much clearer liquidity terms. Across the entire alternative sleeve, investors are just looking for more quality products. They're going away from speculative exposures. For wealth managers, what it really means is due diligence is becoming much more important and also portfolio fit. That is the last section on targeting. What you can see here on this slide is that investment behavior, it changes quite sharply with affluence. As clients move up the wealth ladder, they're not only more likely to hold an investment product, they're also much more likely to allocate a greater share to them. It really tells you where that commercial inflection point sits.
The mass market, they remain very heavily deposit-led. Even the emerging affluent allocates a biggest share still to savings. Once clients hit that mass affluent threshold, investment penetration is becoming much broader. Mass market simply, simple entry products. Emerging affluent, you can start nudging a bit. Once you come to that mass affluent space is where a broader investment proposition really becomes much more compelling. As you can see here on the right, on average, the mass affluent hold GBP 200,000 in liquid assets. Sorry, that's liquid investments, that actually exclude deposit. It's only mutual funds, equities, et cetera. This is when more sophisticated advice actually becomes commercially viable. I now wanna have a look at the different generations that make up the investor base.
Gen Z, millennials, they already account for a big share of the global investor base and they will continue gaining importance just because wealth is being passed on from one generations to younger generations. What stands out here in Asia Pacific is that younger generations, they are really investing at meaningful rates already. If you look at investment penetration, it's actually highest among millennials here in Asia Pacific. The issue is they engage differently though. They're much more likely to self-manage and to use digital platforms. Older cohorts, on the other hand, they are still much more advice-led. For providers, the priority is really to engage early on with these hybrid models and then have these digital models in place, but then have advice on demand.
Further down the line, you've got these life events, you've got inheritance or people just accumulate wealth over time, and that's when the advice needs change. The real opportunity here is to get the foot into the door early and then deepen the relationship later on as the relationship becomes more valuable. This slide here, we talked a lot of about ETFs before. We talked about ETFs in the context of liquidity, active strategies, and just then commodities. I wanna have a look at some demographics now. What you can see is the proportion of liquid assets different segments allocate to ETFs comparing 2018 and 2025. First of all, you can see allocations pretty much increased across the board. However, some segments stand out. We've got the mass affluent and then also younger segments.
It's not only DIY investors anymore. You also see ETFs much more coming up in the advised portfolio. It's not high value for wealth managers, it's really a clear signal where demand is heading. The recommendation is that you can't ignore these investors, use ETFs basically as an entry point. They're low cost, they're transparent, they're easy to understand, have a view of deepening the relationship later on over time as the relationships becomes more complex. Our last slide, some key takeouts before I finish. We've talked about this a lot. Geopolitical uncertainty is now a major portfolio driver, investor behavior, it's becoming more defensive, it's becoming more selective.
As a result, we are also seeing slower liquid wealth growth at the moment, especially outside that high-net-worth segment. However, as part of that more long-term trend in Asia-Pacific, investors are moving more to markets-based assets, even though it's slower than globally. We are also seeing strong demand for alternatives, pretty much as investors are looking for diversifiers, but the focus here is really on quality. In the same context, tokenization is becoming much more relevant, as it basically improves access. Lastly, we talked about younger generations. Millennials have the highest penetration rates in Asia-Pacific, but they do engage differently and hybrid models work most effectively to get the foot into the door early. Thank you so much for joining me. Irene, I'm passing back to you.
Yes. Thank you, Heike. For those who have questions, please leave them in the Q&A tab below. If you don't have any questions, feel free to also send us via the email address you see on the slide here, or you can also just separately reach out to me as well. Okay. I don't see any questions for now, but yeah, if you guys do have anything, please feel free to let us know, or if you want a sort of one-on-one demo on how the information can be extracted from the platform, please also let us know if you'd like a short demonstration as well. Okay. I think there are no questions. If there's no further questions, let's go ahead and round up the session.
Thank you, Heike, and thank you everyone for your time. We look forward to seeing you in the next webinar. Thank you.
Thank you so much.