This year will squeeze asset managers profits more than 2008, according to a report from Watson Wyatt, the global consultancy firm.
Because most of the market falls of 2008 occurred in the fourth quarter, their impact on asset managers revenues was muted, says the report, The future of the asset management industry.
However, it says, asset managers are starting 2009 with revenue run rates perhaps 30-50% below 2008 levels, meaning that if markets are flat, asset managers will earn much less this year than in 2008, even as their customers see the value of their investments rise.
This means that cost-cutting measures in investment management houses are not over, according to the report. Watson Wyatt says its research has concluded that British asset managers are aiming to reduce staff numbers by about 10% and costs by about 20%.
However companies face a dilemma in that the more highly paid members of staff, who constitute a large cost, also contribute the most to revenues, the report adds. Bonuses are likely to fall further this year, it says.
The report suggests that predictions of widespread consolidation may be flawed, and instead foresees rationalisation among funds. Where acquisitions occur, there is a danger that acquirers may overpay for troubled firms.
We do believe there is such a thing as too much active management, the report says. Reducing the number of asset managers in the industry would not change the odds of achieving positive alpha (still less than 50%), but it would mean that less of the underlying asset return would be spent on the pursuit of alpha.
Meanwhile, higher compliance costs could result from increased regulation, although regulatory changes are likely to be mainly aimed at banks, says Watson Wyatt.
To prepare themselves for the financial pressures, fund management groups should aim for ownership structures that are free of short-term pressures to deliver results to a disparate shareholder base, the firm recommends.
They should also consider reducing fees in exchange for a lock-up of funds, and shifting to performance-related fees; meanwhile, the company says they should prepare strategies for worst-case scenarios.
More drastically, managers should consider whether the current extent of active management remains appropriate for this fund, the report says.
Winds of change