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Looking good

31 May 2004 Angelo Coppola

Business confidence in the investment management industry has almost doubled in the last year, according to the results of the fifth quarterly Ernst & Young Investment Management Index.

According to Lesley Harvey, head of Ernst & Young’s investment management practice, the increase in the confidence levels over the year is directly attributable to the improved market conditions.

“Portfolio management has been a more pleasurable experience over the last year than it has been for some time,” says Harvey.

The ALSI increased by over 25% during the 12 months to 31 March 2004, the repo rate has reduced substantially, and property markets have improved.

This has resulted in increased funds under management as a result of market movements as well as new fund inflows.

The survey indicates that improved market conditions have resulted in changes in product demand. A year ago, the products in most demand were absolute return funds, other alternative investment products and fixed income funds.

Although demand for absolute return funds and alternative investment products remains relatively high, it has grown at a lower rate over the last six months.

Specialist equity funds have become more popular and this popularity is expected to continue over the next year. Demand for fixed income funds, which was enthusiastic a year ago, has been waning over the last six months.

According to the survey, income improved during the first quarter, but large managers were under pressure to reduce management fees.

“This was not mirrored by the smaller managers, whose management fees continued to increase,” Harvey says.

Expenses of large managers increased, but at a slower rate than their income, leading to slightly improved net profit. On the other hand, smaller managers did not experience an increase in costs and experienced increased profits.

Marketing costs increased across the board, although particularly strongly for the larger firms. Large managers paid lower bonuses in the first quarter of 2004, in contrast to the smaller managers that paid higher bonuses.

The survey points out that the regulatory environment became more restrictive, and respondents expect the environment to become even more restrictive over the next year.

A number of new statutes and regulations came into effect, including the Financial Intelligence Centre Act and the Financial Advisory and Intermediary Services Act.

“Recently, investment managers have also been affected by the Collective Investment Schemes Act, the Promotion of Access to Information Act, the Financial Sector Charter and reporting of foreign assets,” notes Harvey.

She adds that there are a number of regulatory matters in the pipeline, including two new anti-money laundering bills and the regulation of hedge funds.

A special question on compliance with the Global Investment Performance Standards (GIPS) was posed in the first quarter of 2003 and the first quarter of 2004.

In 2003, 88% of respondents said that they planned to comply with the standards. All managers now plan to comply. “This is very pleasing,” says Harvey, “as GIPS are the internationally accepted standards for the calculation,

presentation and reporting of investment performance.”

She says that clients of investment managers will gain confidence in the information they are provided and compliance with the standards shows huge commitment by the investment managers with regard to implementing global ethical standards.

What may seem disappointing is that nearly one third of managers intend to comply only after 2007.

“It is not as bad as it looks,” says Harvey, “as managers are required to have five years of compliant information before they can claim compliance with the standards.

"If their inception date was within the five year period, they may claim compliance since inception.”

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