Asset Management confidence rises sharply, following equity market gains

A survey released by Ernst & Young today, indicates that despite asset managers continuing to report lower profits in the 3rd quarter of 2009, asset management confidence nevertheless rose sharply, from 60 index points in the 2nd quarter, to its current level of 86.

The revival of asset management sector confidence is being experienced by small and large managers alike. The large managers saw confidence levels rise from 61 to 84. Small manager confidence also rose even more sharply, from 57 in the 2nd quarter to 89.

This is the 29th quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Comments Chris Sickle, the lead Asset Management director at Ernst & Young, ‘This is the second consecutive quarter that we have seen asset management confidence moving rapidly higher from its lowest point. Large manager confidence troughed in the 4th quarter of 2008, whilst small managers reached their lowest confidence reading in the first quarter of 2009.’

Indeed, asset managers are leading their financial sector peers in confidence readings right now. Whilst both investment banks and life insurers have experienced rising confidence levels, they both remain well below their historical average confidence level readings.

He continues, ‘The reason for this is not difficult to gauge. Equity markets seem to be rising again, and coupled with this, there is talk of an end to the recession in much of the developed world. As a result, world commodity prices have revived, and there has been a gradual improvement in capital market liquidity. All of these factors are very supportive of a turnaround for asset managers’ prospects.’

‘Nevertheless’, he continues, ‘Profits growth for both small and large asset managers are not positive just yet. Small managers’ profits growth was flat during the quarter, after four successive quarters of contracting profits. Large managers reported a fifth consecutive quarter of contracting profits, albeit at a slower rate of contraction.’

‘The improvement in confidence is as a result of improving inflows, and coupled with that, growing Assets under Management and income levels. Overall, net inflows revived considerably during the quarter, with all market segments showing an improvement. However, it was the small managers who benefited the most from the growing inflows, with large managers still experiencing flat inflows in their institutional and private client segments, whilst inflows from unit trusts continue to increase.’

Coupled with the rising inflows, asset managers reported a considerable turnaround in their income flows. After facing contracting income for four successive quarters, income levels rose, in tandem with the rising inflows. However, says Sickle, ‘whilst both small and large managers experienced improving trends in income levels, only large managers reported positive growth. Small managers continue to experience contracting income pressures, albeit at significantly improved levels than the prior three periods.’

Comments Sickle, ‘It is essential to get average management fees growing positively, and this is something that small and large investment managers have battled with since the middle of 2008. Average management fees grow more readily in an environment where inflows are rising and assets under management are growing. Both of these latter measures are now moving favourably once more, which should provide continued support for asset managers’ income growth going forwards.’

Other survey findings include:
§ Expenditure has increased slightly over the last quarter. This is largely attributed to small managers increasing their back office staff numbers. Whilst large managers have been particularly focused on cost reduction, and benefited from flat costs in the 3rd quarter, their distribution costs have increased.
§ Bonus payments have played a major role in cost containment – fewer fund managers have achieved their mandates, resulting in a substantial cut-back in bonuses paid.
§ Product demand has shifted considerably in the last six months. All asset classes, except fixed income and guaranteed products, are registering increased demand. Higher risk products, such as general equity funds and specialist equity funds, registered strong advances in popularity.

Concludes Sickle, ‘Although asset managers have made significant strides in cost reduction, they nevertheless continue to experience contracting profits, albeit at a slower rate. However, the outlook is for the profit trend-line to continue rising in the fourth quarter. Small firms are particularly bullish on their 4th quarter prospects, and this accounts for their higher confidence levels. ’