Asset management confidence falls to all-time low levels

A survey released by EY today indicates that confidence in the asset management industry fell sharply again in the fourth quarter of 2014, with stock market weakness, coupled with slowing inflows, impacting sentiment.

This is the 48th quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Overall confidence fell from 52 index points in the third quarter to a historical low of 33. The weaker confidence was mostly due to the sentiment of large managers. Asset manager confidence levels are well below long-term average levels, and this makes asset managers the least confident across the financial services sector.

EY Asset Management Confidence JSE ALSI Index

Chris Sickle, Asset Management lead director at EY, points out that asset management confidence declined through the whole of 2014. “Prior to 2014, most asset managers benefitted from very strong equity markets. This supported strong inflows into the various portfolios, and as a result earnings growth was positively impacted. The year2014 saw much slower equity market gains, which slowed inflows, and management fees also under pressure. As a result, earnings growth has slowed quite noticeably.”

The lower asset management confidence is out of sync with stronger confidence across financial services, which rose in the fourth quarter. Sickle says that this once again illustrates that “asset managers do not typically benefit from the same drivers that other financial services segments do. Even weak gross domestic product growth through 2012 and 2013, for example, did not impact much on asset managers. However, ultimately asset managers will need stronger economic growth to support inflows.”

The survey results further illustrate that the drop in confidence is due to strong net fund institutional outflows for the third consecutive quarter. Sickle comments that “the sustained loss of funds undoubtedly pressures earnings. While profits continued growing in the fourth quarter, the pace at which profits are growing has slowed considerably. Asset managers are no doubt concerned that should funds under management continue shrinking, they will most likely face profit squeeze very soon thereafter.”

The survey further finds that cost growth slowed in the fourth quarter of the year, following accelerating costs in the prior two quarters. Asset managers shrunk their headcount during the quarter, albeit only marginally. In addition, bonus payments and marketing cost growth slowed considerably.

Sickle concludes, “Weak equity markets will likely remain a challenge in the short to medium term for asset managers. While recent announcements by the European Central Bank on quantitative easing may yet provide new inflows of funds into our market, overall, renewed global uncertainty over growth may keep investors away from emerging markets. In addition, local growth prospects remain weak, which is also not supportive for strong inflows growth. Boutique managers appear better placed than asset managers to weather the storm, as they typically do not feel the impact to the same extent as their larger rivals do.”

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