Investment Management Industry Shrugs off Equity Market Turmoil
The 19th quarterly Investment Management index survey results indicate that despite volatile equity markets experienced in August, the impact on confidence in the industry has been minimal. These are the findings of the latest survey, released today.
Comments Chris Sickle, Ernst & Young Investment Management Industry spokesperson; "The South African Investment Management market has benefited from a few successive years of strong positive gains in equity markets. This has undoubtedly had a direct impact on their bottom-line profitability and hence confidence levels. The third quarter of 2007 was the first for quite a number of years where equity markets saw considerable volatility. One could have expected investment managers to experience lower levels of confidence, on the back of more market volatility."
On the contrary, investment management confidence actually rose during the 3rd quarter. Says Chris Sickle; "The fundamentals for investment managers remain strong. Net Inflow growth is up in the case of the large managers, whilst income growth is rising in the case of small investment managers. It appears that the global market jitters have not changed the sentiment of investment managers."
Overall, Investment Management confidence rose 1 index point, from an already high reading of 98 index points, to 99 points during the 3rd quarter. Large managers' confidence remained at the 100 point maximum, whilst small managers' confidence rose to 97 points, after falling to 90 points in the previous quarter. Comments Sickle; "Confidence levels remain very high, in line with the other financial services sectors, namely banking and life insurance. All three sectors have confidence readings in the high 90's. Higher interest rates, slowing credit demand, and unstable equity markets have not yet hurt the confidence of the financial services industry in a noticeable way."
The volatile equity markets did lead to some product lines receiving slower net inflows, particularly in the case of the retail market. Comments Sickle; "This is not an unusual phenomenon. Retail investors often withdraw funds after a market shock, or at least slow down the pace at which they commit new funds for investment. The overall trend for unit trusts, excluding money market funds, was a contraction of inflows, i.e. net outflows of funds."
"Institutional fund flows, by contrast, are not as quick to respond to market movements. For a while now, institutional fund flows have been declining, and in fact, during the 3rd quarter, were flat. The drivers behind institutional fund flows are numerous, and what we have seen for a while now, is a shift out of large fund managers, towards boutique style operations, and this is something that by and large continues to drive industry inflows."
The survey also found that income growth exceeded expenses growth during the quarter under review, a turnaround from the previous three quarters. Says Sickle; "This is a welcome turnaround for investment managers. For the past three years, investment managers have had sustained strong equity markets, resulting in larger inflows. This in turn has allowed them to build capacity, and to employ additional people to cope with rising demand for investment products. However, since the last quarter of 2006, expenses growth began outpacing income growth."
He continues; "As a result of the slowing income growth and rising expenses growth, net profits growth has slowed over the last two quarters. This quarter saw a relatively sharp fall in expenses growth. This was driven by slowing employee growth, IT costs, and marketing expenses growth. In addition, there was a slowdown in the growth in bonus payments." However, cautions Sickle, "It is only the large managers whose income growth exceeds expenses growth. For the small managers, there is a continued net contraction in profits growth, driven by unfavourable 'operating jaws.'"
To some extent, the slower income was caused by lower performance fee growth, in turn largely due to weaker equity markets in the 3rd quarter. Says Sickle again; "Although performance fees are linked to specific benchmarks, declining or static equity markets invariably see a fall-off in performance fees, particularly in the case of alternative investment products, where certain thresholds have to be met before a performance fee is payable. Base fees, on the other hand, continue to see stronger growth, whilst average management fee growth has remained stable since the last quarter."
Other findings include a slight shift in product demand over the last two quarters, despite weaker equity markets. Guaranteed funds continue attracting very low interest, whilst the interest in hedge funds and other alternative investments remains strong. The demand for index and tracker funds also remains weak. Even demand for fixed income funds, which usually come into favour in times of market uncertainty, remains weak.
Concludes Sickle; "Thus far, a volatile JSE and other global equity markets, have not hurt industry confidence. Nor has there been much impact in terms of consumer behaviour thus far, with the same investment products maintaining popularity, whilst the perceived less 'exciting' products continue to attract little interest from investors. We will have to see whether equity markets turn weaker or remain volatile in the last quarter of 2007. Should the sub-prime crisis in the US continue to have a knock-on impact across the globe, there may well be stronger outflows in the quarters to come, as investors seek to take shelter. Thus far, investment managers are taking the turbulence in their stride."
