Investment Managers’ Confidence falls on back of Slowing Inflows and Market Uncertainty
Confidence in the investment management industry fell across small and large managers alike, the latest Ernst & Young Investment Management index results reveal.
This is the 21st quarterly survey conducted to measure confidence in the investment management industry. Investment Management confidence is in line with that of the banking industry (78 points), reaching 77 index points in the first quarter. Chris Sickle, Investment Management Director at Ernst & Young comments, ‘The economic fundamentals have turned for the worse in the last quarter. Volatile equity markets have led to reduced fund inflows and declining assets under management, which in turn has squeezed average margins.’
Whilst small and large investment managers reported much slower confidence levels, small managers saw the most drastic decline, from 89 to 61 index points. Large investment managers’ confidence fell from the maximum 100 point level to 83 points. Says Chris Sickle, ‘The large managers have greater resources to use when market conditions take a turn for the worse. Even though net inflows turned negative for large managers, they remain a little more optimistic than their smaller peers about business prospects.
Continues Sickle, ‘We commented last quarter that confidence remained strong for large investment managers, despite reflecting slowing growth trends, as were the small managers. Typically, lower confidence levels are preceded by a few quarters of slowing business fundamentals. That is equally true for the banking industry, where the latter half of 2007 saw signs of strain creeping through, whilst confidence remained strong until the current quarter.’
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Net inflows slowed for small managers, whilst in the case of large managers, net inflows turned negative. This is the first time since early 2005 that the industry has reported net outflows of funds. Comments Sickle again, ‘ This is not surprising on the back of the volatile equity markets we have experienced since the middle of 2007. It is not only local uncertainty, but global volatilities are also playing a role in keeping investors’ funds away.’
Sickle continues, ‘The largest outflows stemmed from institutional clients. Often institutional fund flows are difficult to predict and often depend on the gain or loss of a single mandate.’
The first quarter of 2008 saw retail unit trust inflows growth turn sharply lower, although remaining solidly in positive territory. However, a comparison between small and large managers indicates they had very different experiences. Whilst large manager retail unit trust inflows remained strongly positive, the small managers experienced a strong contraction. Says Chris Sickle, ‘ The large managers make use of their larger resources to limit fund outflows. Not all of the small managers have the ability to increase marketing spend and enhance their visibility, and the large managers benefit from stronger profiling in times of volatile and falling stock markets.’
The survey also found that profits came under pressure in the first quarter of 2008. Both large and small managers alike reported pressured performance fees. Says Sickle, ‘ It is more difficult to earn performance fees in volatile markets. Given that benchmarks are used to determine performance fees, it is more difficult to achieve that benchmark in bear markets.’ On top of that, average management fees were also pressured, and contracted during the quarter. Comments Sickle, ‘Given that there were net outflows of funds from the industry, coupled with market volatility, assets under management would have been lower at the end of the quarter, in turn impacting through squeezed average fee charges.’
Overall revenue fell sharply on the back of lower base management fees, performance fees, and squeezed margins. Once again, the small managers bore the brunt of the fall-off, with margins squeezed a lot harder by the impact of lower assets under management.
On the cost side, all categories of costs showed a slowdown, most notably back-office, administration and distribution costs. Slower markets also meant that bonus payments growth slowed as well. Overall, however, expenses growth slowed only marginally, with the small firms seeing no change between the previous quarter and the current one.
Overall, the sharp slowdown in income, on the back of negative net inflows, coupled with only moderate cost containment (and only in the case of the large managers), meant that profit growth was severely squeezed in the first quarter. The profit growth decline was sharper in the case of small managers, and no doubt contributed to the fall off in confidence levels. The expectation for the 2nd quarter is that profits growth will decline even more, across both small and large managers, with the small managers expecting to report flat profits.
In conclusion, says Chris Sickle, ‘ The business fundamentals are definitely a lot weaker now than they have been for some time, and with expectations that things will get even tougher in the second quarter, coupled with a negative economic outlook, we think confidence levels are likely to continue downwards, in line with the other financial services segments.’
