Asset Management confidence falls in line with weaker equity markets
A survey released by Ernst & Young today, indicates that confidence in the asset management industry fell sharply in the second quarter of 2010, in line with a volatile equity market and sharply lower closing levels.
Large asset manager confidence fell from 100 index points (full confidence)in the first quarter to 83. Small managers also reported weaker confidence, from 89 in the first quarter of 2010, to the current level of 72 index points. This slower confidence was driven by weaker inflows and income growth, and despite stable margins. his is the 30th 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 & Young, ‘Despite the weaker confidence levels of asset managers, these levels remain in line with the long-term average level (85 index points).’
He continues, ‘Asset management confidence continues to track equity markets. There is a strong correlation between equity markets and asset manager inflows. Weaker equity markets impact the bottom-line profits of asset managers via slower inflows, weaker funds under management, and thereby, slower profits. This was certainly the case for large managers, while small managers for the most part also felt a similar burden, albeit with rising income growth.’
Since the second half of 2009, asset managers had seen a gradual improvement in all of these fundamental measures, resulting in positive profits growth in the last quarter of 2009. These rising profits have continued into the second quarter of 2010, but have slowed considerably for both small and large managers alike.
He adds, ‘The large asset managers remain more confident than their small peers, since the mid-point of the global liquidity crisis (4Q08). They have benefited from a larger share of new institutional flows, and this resulted in higher revenue flows. The second quarter of 2010 saw a relative shift in fortunes, as small managers reported sustained income growth, despite slower inflows.’
In addition, says Sickle, ‘There appears to be significant cost pressures building in the asset management market, particularly among small managers, who had to manage costs rather carefully through the crisis period. As a result, costs rose only marginally through 2009, but accelerated sharply in 2010. This cost growth is led by a need for greater professional staff, increased back-office capacity and in tandem, IT and systems related costs.’
Lower bonus payments and slower marketing and distribution cost growth was insufficient to offset the large increases across the above-mentioned cost categories.
Other survey findings include:
* Small asset managers continued to account for a disproportionately larger share of the cost increases;
* Bonus payments contracted, in line with greater equity market volatility and contracting performance fees; and
* Foreign operations remained highly profitable during the quarter.
Comments Sickle, ‘Local operations have out-performed offshore offices for a continuous six quarters, but this reversed in the second quarter of 2010. He says, ‘global equity markets were relatively strong in the 2nd quarter, and offshore offices are providing relatively strong investment returns in their base currencies. During the quarter, the more stable Rand has allowed for offshore equity market gains to be translated into Rand gains too.
In conclusion, Sickle says that despite the weaker asset management confidence, levels recovered from the crisis more rapidly than other financial services segments, and remain comfortably within pre-global crisis levels. ‘This indicates that conditions for asset managers overall remain strong. A reading above 50 index points illustrates sector strength, and therefore, overall, confidence remains buoyant.’
