Asset management bosses are unusually glum. Not only are markets in turmoil, but their businesses are increasingly under pressure from clients who are switching to alternative investments while pushing for lower fees.
Michael Dobson, chief executive of Schroders, the fund manager, was he first last month to highlight the rush of investors pulling out of equity and bond funds to hoard cash in a headlong flight to safety.
With the exception of Peter Hargreaves of Hargreaves Lansdown, few chief executives in the industry have since missed an opportunity to caution publicly that more market turbulence is on the way while privately worrying that further bouts of poor investment returns and renewed calls for lower charges will permanently dent profitability.
Jupiter said last month it expects its average fee margins – average fee per asset under management – to fall 2 to 3 basis points a year. Up to now pressure on fees has been offset by efficiencies elsewhere and Jupiter’s operating margins – its profitability – have risen. But Philip Johnson, the finance director, acknowledges “the outlook is uncertain†post the Financial Services Authority’s review of retail distribution designed to improve financial advice and make fund fees more transparent.
The issue is global with investors in Asia and America turning to alternative investments rather than to funds. Industry experts say that more than a decade of poor returns and high fees has eaten into investors’ faith in funds. And now income-hungry investors can earn the same yields from individual shares and exchange-traded funds that they would have got from collective funds. And they can do it more cheaply. Insiders warn the industry must find ways of boosting returns and/or tie fees more closely to performance.
John Fraser, chairman and chief executive of UBS Asset Management says: “It seems that people, particularly in Asia, are buying more and more individual securities and structured products. This is a reaction to mutual fund performance in volatile markets and also questioning of the fee levels.â€
Asset managers have never faced such stiff competition, says Ben Phillips, partner of Casey Quirk, a US consultancy. “Investor demand is changing dramatically and companies will have to innovate on a number of levels.†Insurers, banks and brokers are scrambling over themselves and fund managers to provide investors with portfolios of stocks and investments that have been designed to meet their requirements or protect capital and pay out predictable returns, says Mr Phillips.
Regulators meanwhile are stepping up pressure on asset managers and advisers to be more transparent about how they are rewarded. Mr Phillips says investors are not rebelling so much at the amount taken in fees but at the structure where managers take a slice of assets under management regardless of client losses.
Robert Talbut, chief investment officer at Royal London asset management, says the sector must come up with a new business model since returns are “highly likely†to be lower than they have been since the 1980s. “The industry needs to lower fees,†he says.
Royal London, like Henderson and Aberdeen Asset Management, has sought to maintain profitability by acquiring assets offsetting the pressure on fees with more efficiencies, says Mark Williamson at brokers Peel Hunt.
So far the move out of funds is hardly discernible, according to the UK’s Investment Management Association. The bulk of UK investors’ savings are still in funds. In 2009 and 2010 about £29bn of new money was invested in unit trusts.
Nonetheless, investments in structured products designed to pay a defined return and shares in cheap exchange-traded funds that track indices, have been rising fast. BlackRock, one of the world’s largest money managers, on Thursday celebrated a 71 per cent increase in the UK money flowing into its iShares ETFs over 12 months – a market that has been slow to develop compared with the US.
Money has been flowing into structured products at an increasing rate, too. By the end of 2010, assets had risen 13 per cent year on year from £46bn to £52bn, according to StructuredRetailProducts. That is on the back of a 48 per cent rise in new sales in 2009. The UK is still small compared with other markets. US sales of structured notes rose to a record $47.1bn in 2010, according to Bloomberg data compared with the $33.9bn in sales recorded by StructuredRetailProducts.com in 2009.
Even so, in a survey of UK investors, carried out for the Financial Times this year, 40 per cent of respondents said they now held some form of structured product. This is in spite of the increased regulatory scrutiny of structured investment products following worries that the risks are not well explained by providers or understood by investors.
And as more clients shift their savings to cheaper securities or bespoke investments structured to achieve set targets, it will become harder for fund managers to maintain their margins.
Industry executives are quick to deny that a death knell has sounded over the industry. The head of one international wealth manager says asset managers are still in pole position to benefit long-term from the rise in the numbers of individuals’ saving money and governments that will be forced to privatise retirement provisioning.
But these investors are unlikely to sit quietly if markets tank and their managers go on taking 1.5 per cent of their money every year. It won’t be money for old rope.
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