A survey released by Ernst & Young today, indicates that confidence in the asset management industry fell yet again in the third quarter of 2011. The fall in confidence levels was once again moderate, with confidence somewhat below long-term average levels (84 index points).
Asset manager confidence fell from 77 index points in the first quarter to 70 points in the second quarter of 2011.
This is the 35th quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.
Both large and small managers reported weaker confidence, with the fall more pronounced in the case of small managers. Small firm's confidence fell from 88 index points in the second quarter to its current reading of 74 index points. Large manager confidence fell less noticeably, from 73 index points to 68.
Chris Sickle, Asset Management Lead Director at Ernst & Young points out that the recent fall in confidence must be seen in context of the previous slides in confidence. 'In the last quarter of 2010, confidence levels were substantially higher than what they are currently. Since then, confidence has gradually retreated, and is currently close on 20 index points lower.'
He adds, 'To some extent, this can be explained by market volatility. If we take the JSE ALSI index as a proxy for equities generally, then the stock market is considerably below where it was in the middle of 2010. However, there has been considerable volatility in the interim period, with no clear trend emerging. As a result, asset managers have struggled to attract new funds, particularly in the most recent two quarters.'
'Nevertheless', he continues, 'net inflows have remained positive through the last year (four quarters), although in more recent times only marginally so. Institutional funds have been particularly weak through the last two quarters, and retail funds (excluding money market funds) have seen a sharp fall in inflow growth.'
He further adds, ' In an environment where equity markets are down, and inflows are slowing, there is undoubtedly pressure on profits, given that average management fees in such an environment are likely to be under pressure. This is precisely what we saw in the third quarter, with fees contracting for the third consecutive quarter. As a result, bottom-line profits growth was pressured downwards.'
Says Sickle again, 'To some extent, asset managers were able to respond to the slower revenue growth by adjusting their costs downwards. As a result, costs slowed sharply, particularly marketing costs. This was achieved despite continued growth in the hiring of new employees, although there was a noticeable slowdown in the hiring of professional staff (portfolio managers and analysts).
In terms of product demand, the survey indicates that the demand for tracker and index funds remains weak, as does the demand for style funds and specialist equity funds. The strongest level of interest from the investor community is in absolute return and balanced funds, and there was sustained high interest in foreign investments.
Furthermore, the asset management sector continues to observe that the regulatory environment is becoming increasingly difficult to navigate, with more than two thirds of respondents indicating that this is a concern.
Sickle concludes, 'Current market conditions are not ideal for asset managers. The multiplier effects of the Euro-zone sovereign debt crisis are likely to remain with us for a while yet. Asset managers expect profit growth to remain pedestrian in the fourth quarter of 2011, and as a result, will continue to contain cost growth. Coupled with the stricter regulatory environment, and uncertain inflows, it is not surprising that confidence levels are somewhat below long-term average levels.'