Top asset managers lose US$16 trillion

“2008 was a dreadful year for fund managers, with the majority posting record losses,” says Carl Hess, global head of investment consulting at Watson Wyatt. “Even after the strong market recoveries since March this year, our expectation is that values will remain below 2007 levels, meaning that the outlook for this year’s revenues and earnings in the sector remains poor.”

Hess explains that the top 20 managers accounted for one-third of all losses (US$5.6 trillion) in 2008—although their share of total assets in the research remained high, at 38%.

“The larger firms, historically the main beneficiaries of growth, weren’t immune in 2008, mainly because of the ad valorem fee basis on which the industry is centred,” he says. “This meant that profitability was under pressure as market returns and new inflows remained low and performance fees suffered, and there was little scope for higher fees. Overheads, though, have come down as many managers have undertaken significant severance programs.”

Ten of the top 20 money managers are U.S.-based, managing 51% of these assets, while the other 10 managers are all European-based. Among the top 500, North American managers’ assets decreased by 24% in 2008, compared with European managers’ assets, which fell by 25%. Japanese fund managers, on the other hand, were able to preserve most of their assets during 2008, ending the year only slightly down with US$4.3 trillion.

“While currency movements have played a role in these trends, generally those managers that had higher exposure to bonds are now better off,” explains Hess. “Another trend of the past few years is a growing quality gap, with lower-performing managers struggling, particularly in alternatives. In addition, large well-diversified managers with global offerings and established brands have continued to grow.”

Passive assets saw a sharp decline in 2008, shrinking by more than 25% to US$4.5 trillion, from US$6 trillion the year before. However, passive assets have grown by more than 10% over the past decade, compared with 6% growth of other assets.

“There has been a relatively steady flow of money at the margin into passive management,” says Hess. “The principal factor has been that more institutional investors have concluded that their governance arrangements are stretched thin in overseeing the successful active management of their assets and have added to their passive core.”

Hess expects to see increased consolidation as managers look to add assets, while maintaining their existing cost base, to relieve pressure on profits.

“An additional challenge for managers is increased regulation and the likelihood of higher compliance costs. The third worry is the fall in trust that managers have suffered from their clients. Overall, it’s a tough battleground.”

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