Asset managers expect better times
Who would you talk to if you wanted to get a handle on investor sentiment? One strategy would be to survey as many private investors as possible and draw conclusions from their reactions. A second approach is to talk to the people managing investors’ money. The Bureau for Economic Research (BER) at the University of Stellenbosch has been surveying local asset managers for more than seven years. Their Q3 2009 survey results were released by Ernst & Young earlier this week.
Feeling good – asset managers are upbeat about the economy
The survey distinguishes between small and large asset managers. Large funds are those with more than R20bn in assets under management. The large asset managers’ confidence index surged from 61 points (in Q2 2009) to 84 points by the end of September 2009. Confidence among small asset mangers showed a more significant improvement, from 57 points to 89! Positive sentiment has been largely driven by industry’s expectation of improved profit and operating results. And similar sentiment is taking hold among private investors too.
Overall asset manager confidence has improved for two consecutive quarters. Large manager confidence bottomed in Q4 2008 with the small asset manager confidence index reaching its low in the first quarter of 2009. Chris Sickle, lead Asset Management director at Ernst & Young noted that “asset managers are leading their financial sector peers in confidence readings right now.” In contrast confidence numbers at investment banks and life insurers are well below their historic average. How does one explain this difference? We expect investment banks and insurers rely on actual equity market recoveries whereas asset managers simply need a positive turn in investors sentiment.
“Equity markets seem to be rising again, and coupled with this, there is talk of an end to the recession in much of the developed world,” said Sickle. Improvements in equity markets, commodity prices and capital market liquidity are all positive news for asset managers. Companies relying on investment return will want equity prices to recover further before confidence returns.
Profit still under pressure
Asset managers remain realistic where profit expectations are concerned. These companies generate revenue from annual management fees (and performance fees) on their clients’ funds. As funds under management plummeted through the financial crisis, asset managers suffered a double earnings hit. Annual management and administration fees were calculated on lower values and performance bonuses were practically wiped out. Large asset managers have already endured five consecutive quarters of contracting profit and expect more of the same in Q4 2009. The good news is the rate of decline has subsided slightly.
How can confidence improve when short-term profit expectations are so gloomy? Sickle said asset managers must ensure that “average management fees grow.” They have struggled to maintain this growth since the middle of 2008. “The improvement in confidence is as a result of improving inflows and growing assets under management and income levels,” said Sickle. Asset managers’ confidence is clearly rooted in an expected return to acceptable profit growth in the second half of 2010 and beyond.
Other survey findings
The BER Asset Manager survey made a number of other findings. Expenditure was up across all asset managers as the number of back office staff increased. Distribution costs have also increased significantly as funds struggle to attract scarce investor capital. The survey concludes that staff at the country’s asset managers took significant cuts in bonus payments in recent months. The reason is fewer fund managers have achieved their mandates through tough market conditions. Finally, the BER Asset Manager survey concludes that “product demand has shifted considerably in the last six months.” There is increased demand for most asset classes, with the exception of fixed income and guaranteed products. Funds are flowing to general and specialist equity funds. This signals that investors have regained their appetite for risk.
Concludes Sickle: “Although asset managers have made significant strides in cost reduction, they nevertheless continue to experience contracting profits, albeit at a slower rate. The outlook is for the profit trend-line to continue rising in the fourth quarter. Small firms are particularly bullish on their fourth quarter prospects, explaining their higher confidence levels.”
Editor’s thoughts: Equities have surged since the beginning of March 2009. At one point the JSE was 100% up in US-dollar terms. But many private investors fear the market could retreat at any minute. Perhaps there’s a reason some financial sector players remain cautious. Should asset managers be more confident than their insurance and investment bank peers? Add your comments below, or send them to [email protected]
