Asset Management confidence remains robust in fourth quarter

This is the 44th 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 rose marginally, from an already strong 92 index points in the third quarter, to 96. The sustained strong confidence was predominantly due to the sentiment of large managers. Confidence levels remain well above long-term average levels and the strongest across financial services.

Chris Sickle, Asset Management lead director at EY points out that there was very little change in the fundamentals between the third and fourth quarters. He points out that, "Although economic growth remains sluggish, inflows into the industry remain solid, as investors are typically attracted by bullish stock markets. And although the stock market did not end the year on an all time high, it remains very close to record high territory.”

He adds, "Asset management confidence remains strongly ahead of its long-term average levels. Their confidence is significantly higher than other financial services segments. Strong inflows, coupled with strong stock markets continue to drive favourable revenue trends, and as a result, profits are growing at record levels.”

 

In addition, he points out, "Foreign operations are doing equally well for asset managers, with strong stock price gains in mature markets also contributing to solid profit gains.”

The survey findings also indicate that asset managers have earned higher levels of performance fees in the second half of 2013, following a year of shrinking performance related fees. Sickle comments, "Performance fees are difficult to predict, as they are dependent on exceeding benchmarks. The higher performance fee revenue indicates that more asset managers have not only provided strong absolute investment returns, but have exceeded the benchmarks for those funds. These higher performance fees were strongly supportive of bottom-line profits.”

In addition, base management fees also increased solidly in the fourth quarter. The combined effects of stronger performance and base fees led to accelerating revenue in the fourth quarter. Sickle points out that the pace of income growth was particularly strong in the last quarter; "Successive strong quarterly gains in both stock markets and rising inflows have accumulatively built up for more than two years. This has contributed to the strong overall bottom line profits recorded in the fourth quarter of 2013.”

He adds, "We expect that asset management earnings will be nicely up on 2012 levels, when the financial reporting season begins. Those financial services companies with significant asset management operations should thus receive a welcome boost from their fund management earnings as a result.”

Other survey findings include:

• Sustained strong rises in costs, with IT and systems related costs in particular;

• Continued rising employee numbers, with a very strong increase in the headcount; and

• Strong operating margins, driven by rising fee income.

Sickle comments on the rising headcount, pointing out that prior to 2011, asset managers had limited employee growth. "Much of the current employment growth can be attributed to capacity building needs. Post the global financial crisis, asset managers shrunk their headcount, and as inflows have continued to rise, so the need for additional administrative and professional capacity has grown.”

Sickle concludes that the strong asset management confidence is largely reflected in net profits growth. He points out that, "Unlike retail banks, thus far asset managers have been able to shrug off sluggish economic growth. However, going into 2014, at some point, weak economic growth translates into weaker corporate earnings, which in turn impacts stock markets. Thus the expectations for the first quarter of 2014 are for weaker growth in the key areas of inflows, income and net profits. Nevertheless, the overall direction for now remains solidly positive.”