I read again an interesting piece from Oliver Wyman and Morgan Stanley from earlier this year (2017) on the asset management industry, basically saying that for fund managers the world “had been turned upside down”.
You know the arguments – income falling (increased competition from lower margin products, increased transparency), with costs rising (increased regulatory infrastructure etc.). In their most pessimistic scenario, they have investment managers’ revenues in 2019 about 30% less than in 2016
All of this is true – and in the report well argued and well researched.
Those who are contemplating careers have not missed this tough business outlook. John Authers in the FT points out that only 6% of this year’s graduating class of Harvard MBAs chose to go into investment management. This is half what it was in 2011.
There is (rightly) a greater focus on value for money – the regulator sees it, financial media see it, and most importantly the customer sees it. For example, regulators across Europe have been raising the issue of “closet-indexing” where some funds have been marketing themselves as active stock pickers (and charging fees accordingly) but in fact rarely steering far away from the benchmark – which a lower fee option could do just as well. And indexed solutions and ETFs are where we have seen the greatest growth in investment products.
Fees will also come under closer scrutiny if absolute returns are lower in the future than historically. It’s one thing to pay 1% in fees if you’re getting 15% in fund performance but another thing if you are getting 4 or 5% returns. Also the next generation of fund investors is going to be a lot more tech-savvy, and expense comparisons and general use of technology is going to tighten fees charged.
The costs of doing business are also on the up with the increasing regulatory requirements and reporting.
So all in all quite a challenge for the fund management business………
……… So then I went and looked at how fund management companies had actually done in share price terms in 2017, given the apocalyptic view. (not an exhaustive list, just some names I know)
Schroders + 18%
LionTrust +27%
Jupiter +46%
Man Group +74%
(Source: Bloomberg 28th Dec.)
Not too shabby.
Well-run quality fund management companies with good performance will do well despite the world being turned “upside down”.
The Lex column in the Financial Times this week was big enough to point out how it was wrong with a negative view on a particular investment management stock in a call earlier this year.
There will be changes. We will see more consolidation and continued cost cutting. Boutiques will look to out-source everything apart from core asset management. I suspect we’ll see more “hub and spoke” structures where finance, compliance etc. are carried out at the centre, with individual fund management companies (within the group) focussing wholly on managing money.
Asset gathering and management will continue to be a long-term growth story despite what may seem like near-term storm clouds. The fact that Private Equity continues to have an appetite for investing in this space (TA Associates and Old Mutual Global Investors) underlines this potential.
But I do suspect the landscape will change.
All views are, as always, my own.
Tradewinds 