The World's Asset Managers See Profit Margins Recover To Pre-Crisis Levels - Study

Tom Burroughes

28 June 2013

A worldwide study shows that asset managers made profit margins on a scale not seen since 2007 before the market crash, with median margins of 27 per cent.

The study, by Casey, Quirk & Associates, the management consultancy, and McLagan, a compensation consultancy, covered 101 money managers overseeing a total of $23 trillion of assets. The rise in margins was driven by rising market levels during 2012.

Less positively, a relatively anaemic gain in net inflows of 1.2 per cent in 2012 – compared with a rise of 3.7 per cent in 2007 – increasing fee pressure, and a widening economic divergence among firms post-financial crisis point to growing industry challenges, the report said. The study is called Performance Intelligence: 2013 Survey Results.

The last few weeks has seen a raft of reports on the wealth management and asset management sectors, many of which point to industries challenged by rising client demands, heavy costs, a period of wafer-thin returns on cash, and the competitive threats from new business forms and technology. Among the organisations recently issuing reports have been RBC Wealth Management/Capgemini; ClearView Financial Media ; Boston Consulting Group, CREATE, and PricewaterhouseCoopers.

The asset management survey’s participants largely came from the US Institute and European Institute, which are members-only forums set up Institutional Investor’s conference division for chief executives at major investment houses. Fieldwork consisted of surveys at privately held, publicly traded and wholly or partly owned firms with assets under management ranging from below $50 billion to over $1 trillion in assets.

“With annual net flows of under 1 per cent anticipated through 2017 these findings, based on one of the largest industry surveys of asset management economics, indicate managers must adapt and innovate to keep up let alone to continue thriving,’’ said Kevin Quirk, partner at Casey Quirk.

Traditional investment offerings will continue to be challenged, while outcome-oriented and higher alpha strategies will enjoy the highest net flows, according to the benchmarking analysis. These include: hedge funds; balanced strategies; global tactical asset allocation and multi-asset class solutions; emerging markets debt; and global equities.

“In a slow growth environment, asset retention is crucial, and winning firms stand out with more robust staffing in sales and client service and operationally by aligning their economics for superior attraction and retention of talent,’’ said Adam Barnett, head of the asset management practice at McLagan.

Privately held and publicly listed asset managers enjoyed the strongest revenue growth in the 2007-2012 period, expanding at average annual rates of 8.4% and 7.0%, respectively, according to the benchmarking analysis. Firms owned by larger financial institutions had average annual growth rates of 4.3 per cent over the same period, while revenue at affiliates of asset management holding companies declined on average 4.6 per cent.

Of the firms surveyed, those in the middle, with managed assets between $50 billion and $200 billion, enjoyed the strongest rebound in operating margins, to 32 per cent in 2012 from a low of 15 per cent in 2009, and were most consistent in attracting net flows over the period 2007 to 2012.

“It’s abundantly clear firms must retool to take advantage of market segment opportunities and changing investor demands, or risk losing talent and market share to more adaptable competitors,’’ said Fred Bleakley, director of the US and European Institutes.