Investment Managers’ confidence remains weak on falling equity prices

Confidence in the investment management industry remained at its weakest in the first quarter of 2009. Both small and large managers experienced a continuation in contracting inflows and slowing income growth, the latest Ernst & Young Investment Management index results reveal.

This is the 25th quarterly survey conducted to measure confidence in the investment management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch. Investment Management confidence measured 43 index points in the first quarter, a marginal change from the 42 points measured in 08Q4.

Investment Management Confidence Levels

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The lower confidence is in line with confidence levels in other financial services segments. Banking confidence (37) is lower than that of investment management, while life insurance confidence (46) is marginally higher.

Chris Sickle, Investment Management Director at Ernst & Young comments, ‘The fall in confidence is reflective of continued severely depressed economic fundamentals, both locally and abroad. Furthermore, this weak confidence is in line with volatile and declining equity prices.
Locally, there has been some revival in commodity prices, but the JSE ALSI index, nevertheless recorded a further (albeit marginal) decline during the first quarter of 2009.

Sickle adds, ‘Asset managers have cut back sharply on cost growth in the current quarter. Throughout 2008, costs remained stubbornly high, despite rapidly falling income and falling assets under management, on the back of falling equity markets. But it is often difficult to reduce costs immediately, particularly if one is uncertain about the future direction of business flows. Investment managers have subsequently cut back in a number of cost categories, most notably marketing and distribution costs. In addition, back-office costs are static, while IT and systems cost growth has fallen sharply since the last quarter of 2008. Employee growth has also been curtailed, and the expectation is that there will be a net reduction in headcount in the 2nd quarter’

The survey findings also indicate that for the fifth consecutive quarter, investment managers have reported contracting fund flows. Large and small fund managers alike are losing funds, as investors continue to withdraw funds in uncertain times. Both retail and institutional monies were withdrawn from the industry.

Furthermore, says Sickle, the funds that investment managers did retain have been shifted into lower margin income and bond funds. This has added further pressure to their income flows, in addition to significantly reduced performance and base management fees. Product demand trends show that investors are currently showing a strong preference for fixed income and guarantee funds, and considerably lower appetite for funds that have large equity exposure.’

In such an unfavourable economic environment, operating margins remain pressured, in turn impacting net profits growth. Throughout 2008, income growth declined sharply, driven by lower base management fees and contracting performance fees. Says Sickle again, ‘Investment managers faced contracting profits for the third consecutive quarter. In addition, the rate of contraction is increasing. While in the 3rd quarter of 2008, profits were only marginally negative, the rate of profits contraction has increased considerably in the last two quarters. The length and severity of the current global equity market contraction has unsurprisingly resulted in profit deceleration becoming more noticeable.’

Concludes Sickle, ‘ Times remain tough for the investment management market. Given the sustained uncertainty over the last nine months, only time will tell whether we are over the worst of the global liquidity crisis, and funds begin trickling back into our market.’