The BIG squeeze

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It may be difficult for investors to display much empathy in this regard, but fund managers are doing it tough. Fees are falling, but expenses are still rising – not a happy combination. New research by Casey Quirk paints a gloomy picture for managers.

Casey Quirk, a specialist advisory division within Deloitte which focuses on the funds management industry, in conjunction with an Aon pay-and-performance advisory arm, McLagan, has produced a report that shows that operating margins for fund managers fell by 2 percentage points to 32 per cent last year. Aggregate fees have declined nearly 20 per cent in the past five years, the research report says. In the past year, however, total global assets under management climbed from US$68.3 trillion to US$71.8 trillion.

The annual “Performance Intelligence” report from Casey Quirk and McLagan, says that non-compensation costs — including regulatory, back office processing, technology and office space — rose above 30 per cent from 26 per cent in 2014. As a result, for a firm with approximately US$150 billion in assets under management, for example, the ongoing operational expense of conducting normal business rose US$18 million to US$23 million during that period, according to the analysis.

Managers may find this hard to believe but individuals’ wages are also on the rise, generally. For below-executive level staff, the aggregate rise last year was 5 per cent, and for senior executives the rise was 3 per cent. Chasing scale is becoming more difficult, the report says, with the average cost of managing each dollar of assets rising 4 per cent since 2014.

Amanda Walters, senior manager at Casey Quirk, said: “It’s now a necessity, not a luxury, for asset managers to reduce expenses by automating, streamlining data and technology, and shifting functions to lower cost locations. Additionally, to truly impact overall costs, asset managers need to optimize their team structures and compensation plans more effectively.”

Implementing these initiatives could lead to a 6.5 per cent to 17 per cent decrease in ongoing fixed and variable expense, according to the analysis. This could result in minimum industry-wide savings of US$13 billion, allowing firms to reinvest in strategic initiatives or boost overall profitability.

Asset managers that fail to outstrip such costs with organic or acquired growth will face falling margins and lower profits for their owners or must slash costs elsewhere: shuttering business units, pruning mediocre investment strategies, and resorting to layoffs, according to the report.

Adam Barnett, a partner at McLagan, said: “Today’s environment serves as a warm-up to the challenges we expect during the next market downturn. To succeed, firms must more effectively manage their costs and clarify their value-sharing propositions with employees and shareholders. Disruption is intensifying and no one likes surprises.”

The research report included more than 70 investment management firms headquartered in North America, Europe and Asia Pacific, investing more than US$30 trillion for institutions and individuals. In addition to Casey Quirk’s and McLagan’s own analysis, the study includes data from eVestment and Morningstar, Inc.

– G.B.

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