Investment Managers face fund outflows, and lower profits

Confidence in the investment management industry contracted once again in the fourth quarter. 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 24th 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 fell again during the quarter, from 81 index points in the 2nd quarter, to 49 points currently.

Chris Sickle, Investment Management Director at Ernst & Young comments, ‘The fall in confidence is in line with confidence in the other financial services sectors. It is furthermore in line with the volatility in equity markets. Locally, falling commodity prices have led to a continued falling JSE ALSI index, in turn causing investor sentiment to deteriorate, across both retail and institutional markets.’

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Investment Management confidence declines in tandem with a falling ALSI

In addition, continues Sickle, ‘Let’s not forget that the global economy is facing one of its most crucial downturns in living memory. Such dire economic circumstances do not bode well for equity markets. Much uncertainty continues to dominate investor sentiment, and local markets are dependent on foreign capital, which has largely been withdrawn from emerging economies. Until global economic sentiment turns, local equity markets are likely to remain in a bear-phase, and this in turn will provide fund managers with a difficult trading environment.’

The survey findings indicate that for the fourth consecutive quarter, investment managers have reported contracting fund flows. Large and small fund managers alike are losing funds, as investors withdraw funds in uncertain times. Both retail and institutional monies were withdrawn from the industry, presumably channelled towards safer investment vehicles like money market funds.

The survey also found that while investment managers face contracting income, their expenses growth remains high. Comments Sickle, ‘Typically, it takes a while before cost growth can be contained if not reversed. IT and systems costs are particularly difficult to reduce in a short time frame, and require a longer term framework before they are adequately contained. In fact, says Sickle, ‘IT costs actually spiked in the last quarter, although the expectation going into 2009 is that the rate of growth will slow considerably. Where investment managers have cut back is in direct marketing and distribution costs, which both contracted in the 4th quarter. In addition, bonus payments have fallen sharply, in line with falling equity indices, which makes out-performing the benchmark a lot more difficult.’

In line with 3rd quarter findings, operating margins remain under pressure, in turn impacting net profits growth. Throughout 2008, income growth has declined sharply, driven by lower base management fees and contracting performance fees. Says Sickle again, ‘Investment managers faced contracting profits for the second quarter in a row. Both small and large managers are reporting lower profits than they were earning last year this time.’

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