Asset Management confidence rises after a weak 3rd quarter

A survey released by Ernst & Young today, indicates that confidence in the asset management industry rose in the 4^th quarter of 2010, in line with strong growth in the local equity market. The rise in confidence levels was significant, offsetting the decline in the previous quarter.

Asset manager confidence rose from 71 index points in the 3^rd quarter to 89 points in the 4^th quarter. This places asset managers as being the most confident in the financial services sector, ahead of banking and insurance.

This is the 32nd quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

A breakdown between large and small managers indicates that large managers (those with assets in excess of R20 billion in funds under management) benefitted the most, and are close to full confidence levels, at 96 index points. Small manager confidence rose from 63 to 77, indicating that just less than eight out of ten small managers are satisfied with current business conditions.

Comments Chris Sickle, the lead Asset Management director at Ernst & Young, ‘With the strengthening in confidence of asset managers, levels are considerably above their long-term average reading of 85. However, this is only true for large managers.’

He continues, ‘Asset management confidence has moved back in sync with equity markets in the fourth quarter, as there appears to be a strong correlation between the JSE ALSI index and asset manager confidence.’

Once again, there was quite a noticeable difference between the small and large managers, both in confidence levels, and in certain key financial measures. Based on survey results, the biggest contributors to these differences were in unit trust inflows from institutional clients, total income and expenses, with small managers significantly increasing the number of people employed.

In addition, he says, ‘cost pressures for asset managers collectively remain strong. Costs increased slightly in the fourth quarter of 2010, as a combination of rising headcount, coupled with sustained high back office, IT & systems and marketing & distribution costs, all contributed to a push on cost growth .

Sickle notes that asset managers are not alone in the financial services sector in dealing with a high and rising cost base. Banks and insurers are also faced with a host of regulatory requirements which require continued expenditure in order to comply and meet readiness requirements with this legislation. This includes the demand for new product offerings. As a result, the cost base across financial services companies continues to be pressured, and it is proving difficult for them to achieve cost savings.

In conclusion, says Sickle, ‘fund inflows have recovered relatively well since the global liquidity crisis, despite a hiccup in 3Q10. This has allowed asset managers to weather the storm quite well, and profits have risen noticeably since the middle of 2009. Asset managers have however, felt the impact of sustained cost pressures, as regulations change rapidly in response to a post-crisis world. Nevertheless, asset manager profits have returned to stronger levels than other financial services segments, and the outlook remains strong.