| Asset managers increase their profitability in a new cost environment |
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| 07/11/2004 | |
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The average profitability of European asset managers rose by 32% in 2003, driven by the economic recovery and a previous series of cost cutting measures that finally started to pay off, according to a survey* by McKinsey & Company, a consultancy. Relative costs stabilised at 20.0bp in 2003 for the first time since the survey was conducted in 1998, and after a peak increase in 2002,. "This suggests that cost-cutting programs have finally begun to bite", says the consultancy. The cost containment measures achieved visible results in regions such as Germany and Benelux, where many players claimed the first benefits from restructuring measures: streamlining product portfolios, enhancing straight-through processing and integrating operations across locations. While most key cost categories contributed to the stabilisation, fund management absolute costs rose by 25% between 2002 and 2003, largely driven by compensations granted to star asset managers. "[F]und managers continue to increase their share of value created by the industry. While not yet critical, this gives some cause for concern", points out McKinsey. The resumption of bonus payments and the development of performance fees along the newfound popularity of high alpha products largely contributed to this situation. Revenues on the up After two flat years, revenues resumed growth, helped by a 14% rise in assets under management in both institutional and retail business. The increase was driven by a 6% increase in net inflows of money and a 8% positive performance effect. The new money inflows in most countries were directed towards lower risk asset classes and non-traditional products such as structured, real estate and alternative products, all of which enjoying far higher growth rates, albeit from a modest starting point. This shift in the product mix towards absolute return products impacted the fee structure, giving way to increases in management fees and to a greater use of performance fees. In turn, net revenues rose by 3bp overall, from 30bp in 2002 to 33bp in 2003, after a declining consistently since 1999. Nevertheless, the outlook is not equally rosy for all investment firms. "There is evidence that some large generalist asset managers are under real pressure particularly in terms of growth in assets under management", observes McKinsey. "The trend seems to be favouring smaller, more focused boutiques with credible investment strategies. Generalist players who are finding it difficult to transition to a more specialised approach are flagging." Many recent media stories have focused on managers leaving large investment firms either to set up their own small, usually alternative, investment boutique, or to join existing hedge fund manager. This has left traditional asset managers scrambling to find solutions to retain their staff. *The McKinsey survey collected data from 112 European players with total third-party assets under management (AUM) of €4.0 trillion, representing some 60% of the European market. Julien Laplante |
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Articles of the same Topic : Portfolio management |
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