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Send  Share  RSS  Twitter  12 Oct 2010

ASSET MANAGEMENT: Asset Management Confidence Falls


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A survey released by Ernst and Young today, indicates that confidence in the asset management industry fell again in the third quarter of 2010, in line with a volatile equity market. Whilst the ALSI rose overall during the quarter, there was considerable volatility. The fall in confidence levels was not however significant, unlike the sharp contraction experienced in the second quarter.

Asset manager confidence slipped from 75 index points in the second quarter to 71 points in the third quarter. However, large asset managers’ confidence was basically flat, down only 1 index point from 76 in the second quarter to 75. It was the small managers who felt the brunt of the volatile markets, falling from 72 in the second quarter of 2010, to 63. This slower confidence was driven by weaker income growth, coupled with high expenses growth.

This is the 31st quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Comments Chris Sickle, the lead Asset Management director at Ernst and Young, ‘With the latest weakening in confidence of asset managers, current levels have fallen below the long-term average level (85 index points).’

He continues, ‘Asset management confidence moved out of sync with equity markets in the third quarter. There was a moderate uptick in the JSE ALSI index during the quarter, but asset manager confidence declined nevertheless. Despite the overall rise in the ALSI index though, markets continue to be shaky, both locally and globally.’

‘Furthermore’ he adds, ‘it was really the small managers who experienced substantially worse trading conditions during the quarter, reporting a contraction in base fees whilst performance fees remained flat. Large managers reported growth in both base and performance fees. Consequently, large managers continued to experience strong bottom-line profits growth, despite more volatile fund inflows.’

Sickle continues, ‘Although the small managers inflows continued to grow during the quarter, the income growth is only likely to be evident in the following quarter due the to timing of inflows. Large asset managers, despite losing funds, nevertheless reported a noticeable improvement in operating margins. Unpacking the inflow figures, it was largely institutional flows that appear to have shifted from the large asset managers to the small managers. Furthermore, for small managers, survey data showed a contraction of institutional retail funds, potentially accounting for the lower base fees. ‘However, small managers will welcome these new institutional inflows, as over the longer term it provides them with stronger critical mass, and thereby economies of scale.’

Other survey findings include:
• Private client flows remain weak, with very little in the way of new monies entering the system, which has been the case since the global liquidity crisis;
• Expenses growth continues to rise ahead of that of revenue, for both small and large managers alike; and
• Bonus payments have increased due to increased performance fees, which will contribute to the expenses growth.

Sickle comments on the high expenses growth; ‘Usually, net fund outflows pressures profits downwards, as it impacts income levels accordingly. This in particularly true when cost growth is high. However, in the case of large asset managers, expanded base and performance fess on the back of institutional fund outflows helped offset margin pressure in the third quarter. However, the fourth quarter may see cost pressures catching up with the large managers.’

Concludes Sickle, ‘While the declining inflows (for large managers) did not hurt bottom-line profits in the third quarter, the impact on income growth going forwards is likely to be noticeable. With asset managers expecting to see a further contraction of inflows in the fourth quarter, the impact on bottom-line profits will surely be felt. Cost containment is likely to become more critical, as income growth recedes. Small managers will also be pressured to manage their costs more carefully, even with a moderate gain in inflows and income levels expected.

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