Ernst & Young Launches the Investment Management Index
During the first quarter of 2007, the JSE All share index rose a considerable 8.4%, on already sizeable gains made in 2006. The 1st quarter Ernst & Young Investment Management Index shows that all investment managers continue to remain satisfied with busi
Whilst growth in net inflows have tapered off, and expenses continue to rise in line with greater demand for savings products, net profits continue to grow strongly, on the back of increasing average management fee charges, and higher assets under management.
After declining steeply in the fourth quarter of 2006, average management fee growth revived once again in 2007. Says Lesley Harvey, lead spokesperson for Ernst & Youngs Investment Management practice; 'Although the investment managers had anticipated there would be further squeeze in the 1st quarter, average management fee growth has trended upwards. This was led by the large investment managers, where there was a reverse from declining to rising average management fees.'
These are the findings of the 17th quarterly Ernst & Young Investment Management Index. The research and analysis of the study was done in conjunction with the Bureau for Economic Research (BER) at Stellenbosch University. Confidence is measured by satisfaction with prevailing business conditions, and the survey monitors both small and large investment managers.
Lesley Harvey continues: 'We think that the withdrawal of PIC funds late in 2006 could be driving the revived average management fee growth. Firstly, it was solely the large investment managers who reported growing average management fees, and only the large managers hold PIC funds. Secondly, the investment managers affected have commented that they anticipate the withdrawal of the PIC funds to be earnings neutral in the short to medium term, and probably earnings positive in the medium to long term. The reason for this is that the remaining PIC funds managed in the investment management industry have been re-priced, and are therefore earning more market-related fees than they were in the past.'
She adds: 'Another driver of the rising average management fee growth is performance fees, which have risen strongly in the first quarter of 2007. Once again, it is the large investment managers who reported the strongest gain on this measure, although the small managers also saw continued growth in performance fees. Whilst the survey only started monitoring the trends in performance fees in 2006, it is largely the small managers who have seen high and growing performance fees. This is not surprising, given that the small managers are often boutique and specialist managers whose pricing model is based specifically on a performance fee over and above the base fee.'
Other findings indicate that expenses continue to rise, and more managers are reporting rising staff numbers (both investment management and administrative), than are reporting growing inflows - see graphic above. Strong market performance has meant that most investment managers are paying out higher bonuses, as individual fund managers meet or exceed their mandates. Continues Harvey; Strong market performance over the last few years has resulted in rising expenditure across the industry. Strong inflows have followed the stronger equity markets, across both retail and institutional business units. Coupled with this, the industry has needed to grow headcount to cope with this higher demand. For the last two years, the industry has spent considerably more on increasing their systems spend, making up for very slow IT capex expenditure in 2004/ 2005. On top of this, marketing is key to attracting funds, even in a strong equity environment, and so we have seen considerable rising costs in this area.
Regarding product demand, there have been a number of changes since the third quarter of 2006, when last measured. The product-demand shifts occurred particularly in the guaranteed and absolute return fund categories. Says Harvey again; 'Typically, clients become less risk-averse in times of strong equity markets, and are therefore often keen on funds which have shown signs of particularly strong performance. Many investors follow performance, and feel more confident to take their chances with funds that have performed well. It is for this reason too, that we notice a stronger appetite for foreign funds. The weak currency in the middle of 2006 provided a boost for foreign fund returns, and this has resulted in a renewed enthusiasm for such funds by investors.'
Given the favourable fundamentals in fee trends, net profit growth remained solid in the first quarter of 2007, particularly in local operations. Even so, foreign operations are showing stronger growth trends, on the back of a weaker local currency, in turn driving demand for more foreign funds. Continued growth in net inflows, coupled with strong market performance is resulting in higher assets under management for the industry, and this in turn continues to push quarterly profit growth.
Concludes Harvey 'Like their banking peers, all investment managers continue to remain confident about business conditions. Rising interest rates through 2006 have yet to impact on the savings industry, which is being driven by continued record breaking stock-market levels. Ultimately, the banks expect that there will be a shift away from the fast-growing retail market, towards the corporate sector. Should this happen, it could provide a continued boost to the investment managers too, particularly if this spurs employment creation, which in turn, would provide strong growth prospects for the institutional market.'
