Investment Managers remain confident in a changing environment
The latest Ernst & Young Investment Management Index shows that all investment managers who responded to the survey continue to remain satisfied with current business conditions. Despite a slowdown in average management fee growth, net profits remained buoyant for both large and small investment managers during the fourth quarter of 2006.
Says Lesley Harvey, lead spokesperson for Ernst & Young's Investment Management practice, "The industrys funds under management grew substantially during the quarter under review, thanks to the booming equity markets. In addition, new business flowing into the industry continued to further boost total funds under management growth in net profits and high levels of confidence in the industry are consequently no surprise."
There is, however, evidence that management fees charged by investment managers are coming under pressure as fewer respondents said that average management fees charged were up on the same period a year ago . In the case of large managers, when asked about average management fees charged, more respondents said they were down than up. Small managers failed to achieve the growth in average management fees reported in previous quarters.
These are the findings of the 16th 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 comments, "A competitive market put a squeeze on management fees and, although large managers saw a turnaround to positive institutional inflows, this came at a price. By contrast, the small investment managers continued to enjoy new business from institutional clients, albeit at a slower rate. They also charged higher average fees, owing to the continued demand for their specialist skills, although the rate of increase has slowed."
She adds, "Coupled with the squeeze on management fees, investment managers also experienced strong growth in expenditure. Most significant of these were back office and IT & systems costs. Marketing and other distribution costs also rose sharply. Once again, the rise in marketing costs stems from the need to secure or boost a share of the inflows. With the recent booming equity markets, investment managers are profiling their strong performance and building awareness of the returns they have generated for their clients."
It is clear that higher expenditure and pressure on fees has had an impact on operating margins relative to funds under management, particularly for large managers. Although total net profits continued to rise, operating margins have not risen as fast as funds under management. Large managers expect this trend to turn around in the first quarter of 2007, largely as a result of slowing cost growth. Relative to their funds under management, small managers continued to experience improved operating margins as a result of a smaller growth in expenditure compared with their large counterparts.
After this survey was compiled, the Public Investment Corporation (PIC) announced that it was planning to withdraw investments worth approximately R146 billion from the industry to manage in-house. This withdrawal of investments and its impact are consequently not included in the results of this survey. Clearly with a withdrawal of this size, funds under management in the industry will decrease. The managers affected by this have, however, negotiated better fee structures for the PIC's funds remaining under their management. Consequently, the impact on profitability in the long term is expected to be relatively small.
Says Harvey, "Over the past two years investment managers have been growing capacity and improving their efficiency and effectiveness by restructuring their businesses. This is reflected in increased number of employees as well as the increased back office, and IT & systems costs. In addition, some large managers, having seen the benefits enjoyed by smaller, niche managers, have restructured their businesses to offer the same degree of specialisation as these niche managers but with the support of larger organizations of which they are part. The success of these projects is dependent on many factors, particularly whether the organisation markets the specialisation effectively and the governance and operational structures that are in place. We expect to be able to gauge the impact of this restructuring in 2007."
Concludes Harvey, "A number of factors indicate that 2007 could be another good year for the investment management industry. Investors have demonstrated their demand for new and different products. In addition, the preferred route for savings is tending towards collective investments with investors choosing to use unit trusts as an investment vehicle with their transparent costs. South Africa is the second fastest growing high net worth (HNW) market globally, according to the Cap Gemini Global Wealth report. This should translate into continued buoyant inflows from private clients as the number of HNW individuals grows. All in all, 2007 could match 2006 in providing a favourable environment for the investment management industry."
