At times of stress, investment managers’ actions may not be in investors’ best interests.
Even before the trade press headlines spoke of record fund outflows and weak financial markets combining to create a winter for the investment management industry, fund managers, both big and small were falling over themselves to cut jobs.
They still are.
The biggest garnered most headlines. BlackRock, the world’s largest asset manager, told employees in January that cutting around 2.5% of its total staff was necessary for it to “stay ahead of changes in the market and focus on delivering for our clients”.
Goldman Sachs has also begun to cut over 3000 jobs in what has been described as a brutal process. Alliance Bernstein is cutting jobs – directly linking it to a 17% fall in assets under management. Jupiter, JP Morgan – it’s a growing list. Fund analysts and commentators see more to come.
2022 was certainly a tough year as far as fund flows were concerned – and (with the exception of some ESG mandates) outflows were across the board, sizeable and persistent. UK funds for example saw record outflows every month of the year. US funds had their first year of outflows since 2016. Passive funds had their first ever year of outflows.
So combined with 15-20% decline in the value of many asset classes, it’s easy to see the knock-on revenue impact on asset managers.
And managers have acted quickly to cut costs. Salaries in a typical asset manager account for over half total variable cost, so it may seem like a logical place to bear the brunt.
But does it make sense? Was 2022 a typical year?
No – to both.
Fund outflows on such a broad protracted and massive scale are an exception. Especially for large asset managers, who may have both a retail and institutional profile, actual negative annual numbers are rare. Morningstar data points to persistent positive inflows in the industry. In 2021, fund inflows smashed records.
On top of record fund outflows, 2022 was notable for the sheer fall in markets – not only the depth but also the breadth of negative asset class returns.
Asset management is often said to be a “people business.” Before making the choice, selectors and investors will spend a huge amount of time looking at, and analysing the fund managers, the analysts, the risk managers, the compliance team and many more. They will consider how the culture of the firm depends on key individuals. It can aften be a sensitive “eco-system” of relationships, experiences and dependencies between people that ultimately deliver good performance.
Why put all of that at risk with swingeing job cuts in the face of what we know are infrequent or unusual market conditions?
Investment managers should manage their business through the cycle and not find themselves forced to cut numbers in response to market wobbles – and at a time when, they need experienced resources the most.
Another oft-used arrow in the quiver of cost cutting is fund amalgamation – where two funds with broadly similar mandates may be merged into one. Often cited as being to unlock cost synergies – these are synergies to the firm, not to you as investor as your management costs will not change.
How firmly held are these cataclysmic views and outlooks from those investment firms embarking on job cuts?
Interestingly, I looked at the example of a large company who recently announced very significant cut-backs, in the face of what they described (and here I paraphrase) as once in a life-time perilous market conditions. Into this abyss of doom, what was their investment advice to clients? ‘Stick with stocks, good half two coming’!
Bottom line: If a firm cannot manage their own finances, why should you be content for them to manage yours?
Tradewinds 