Asset Management confidence in line with a strong JSE

A survey released by Ernst & Young today, indicates that confidence in the asset management industry remained strong in the fourth quarter of 2012. The strong confidence levels were aligned to a bullish stock market, and came about despite weak third quar

Asset manager confidence rose from an already buoyant 81 index points in the third quarter to 84 points in the final quarter of 2012.

This is the 40^th quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

The marginal rise in confidence was led entirely by small managers, who reported a strong uptick in confidence, rising from 66 index points in the third quarter to 87. Large manager confidence meanwhile, fell by five index points, from 87 index points to 82.

Chris Sickle, Asset Management Lead Director at Ernst & Young points out that confidence levels are very much in line with a very strong stock market. ’The JSE hit new record territory towards the end of the year, and this was particularly noteworthy because of the general economic turmoil that was anticipated.’

‘In this environment’, he adds, ‘Asset managers recorded strong profits growth, as strong inflows directly impacted bottom-line earnings. In times when equity markets are rising and reaching new highs, asset managers benefit directly via rising fees. This was particularly visible during the second half of 2012. ’

The survey found that base fees were particularly strong for asset managers throughout 2012, rising consistently quarter to quarter. Sickle comments, ‘The JSE rose through 2012, and this created a strong operating environment for most asset managers. This rise in the stock market was not really anticipated, given that economic growth prospects were not ideal, and the third quarter mining sector turmoil should have resulted in a far more subdued stock market. Despite these odds, asset managers had a very strong year, with the industry attracting new monies across all three prominent segments, namely retail, institutional and private clients.’

Looking ahead, the asset management industry remains quite confident about early 2013 prospects. Inflows are likely to remain strong, which will support continued sustained fee growth and bottom line profits. However, the outlook for performance fees remains weak.

Chris Sickle says that it is more difficult to earn performance fees in strong equity markets. ‘Benchmarks are typically much more difficult to out-perform when equity markets are on the up. To achieve growth of a defined percentage is even more challenging, and we noticed that performance fees shrunk through most of 2012 as a result.’ However, the survey indicates that base management fees which make up by far the largest chunk of revenue, more than offset the lower performance fee revenue.

Other survey findings include:

· Costs continue to rise, with all cost areas rising rapidly in the second half of the year.
· The sustained strong cost growth is coupled to continued employment growth – asset managers increased headcount throughout 2012.

Sickle concludes, ‘Within financial services, banks and asset managers both ended the year far more confident than where they started. Despite sluggish GDP growth in the second half of 2012, asset managers and banks benefitted from some unexpected beneficial factors In the case of banks, it was growth in unsecured lending, which drove positive sentiment, whilst asset managers had a major windfall from strong capital market gains. Whether this is sustained into 2013 is largely dependent on the global economic outlook, and on local labour disputes being resolved amicably.’