Asset Management confidence rises sharply, following equity market gains - Ernst & Young
A survey released by Ernst & Young today, indicates that confidence in the asset management industry remained strong in the first quarter of 2010, despite falling confidence amongst small managers.
Large asset managers remained unanimously confident in the first quarter, achieving a level of 100 index points (full confidence). Small managers, on the other hand, reported a fall-off in confidence, from 97 in the 4th quarter of 2009, to the current level of 88 index points. This slower confidence was due to somewhat squeezed margins and slowing income growth.
This is the 29th 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, ‘ large asset managers confidence remains robust on the back of sustained strong inflows growth. This in turn is supporting higher income, and unlike their small peers, larger asset managers did not experience a fall in operating margins. On the contrary, operating margins strengthened noticeably in the first quarter.’
He continues, ‘Strong equity markets remain the single biggest driver of asset manager earnings. Stronger equity markets feed through to the bottom-line profits of asset managers via rising inflows, increasing funds under management, and thereby, stronger profits. Since the second half of 2009, asset managers have seen a gradual improvement in all of these fundamentals, finally resulting in positive profits growth in the last quarter of 2009. These rising profits have continued into the first quarter of 2010.
He adds, ‘It appears that the large asset managers have benefited more from the recovery since the recession ended. They seem to be getting a larger share of new institutional inflows, and this is feeding through to their higher share of revenue flows. In addition, the large managers are able to support higher cost rises, although their costs have been well contained since the onset of the recession. Small managers, on the other hand, reported a sharp rise in costs in the first quarter of the year.
Other survey findings include:
* Operational expenditure increased more briskly in the quarter, with increased headcount, back-office, IT & systems costs, and marketing & distribution costs all rising. Small asset managers accounted for a disproportionate share of the cost increases.
* Bonus payments rose, in line with greater stability in equity markets and in line with moderate growth in performance fees.
* Foreign operations returned to profitability during the quarter, after five successive unprofitable quarters.
Comments Sickle, ‘Local operations continue to be more profitable than foreign operations, although the gap appears to be closing. He explains, ‘ global equity markets have been robust of late, and offshore offices are providing relatively strong investment returns in their base currency. However, the strong Rand has offset a lot of that gain. In the first quarter however, the currency appreciated less robustly against foreign hard currencies, thereby allowing for growth when converted back into Rands.’
In conclusion, Sickle notes that asset management confidence recovered more rapidly than other financial services segments, and is back at pre-global crisis levels. ‘Other financial services segments’ confidence levels remain below their pre-crisis levels. Bank confidence remains weak, and it appears that they are only now starting to recover from the recession. Life insurers have seen some recovery, but are by no means back to pre-crisis levels.
Although small managers saw moderately lower confidence than the previous quarter it remains nevertheless above the long-term average level, indicating that conditions overall remain buoyant for them.’
