Fund managers heed profit warnings, says PwC
FUND MANAGEMENT – The fund management industry appears to be responding to warnings of significant profit declines after a year of increased competitive pressure, with profit margins falling less than expected reports, according to a survey by consultant PricewaterhouseCoopers.
The interim survey, which covers a large representative sample of the investment management industry in the UK and Ireland, compliments the firm’s annual 2001 investment management published in July this year.
In July, PricewaterhouseCoopers warned fund managers that if current market trends continued and no management action was taken, margins would halve to around 15%.
But the interim survey from October reveals that margins have so far fallen by only around a quarter.
PwC notes that despite falling fund values, revenue has so far been sustained, thanks to a strengthening in pricing - reversing the previous steady decline witnessed over the past 6 years.
The consultant adds that while costs have yet to fall, the rise been checked and that after continued increases during the first quarter, costs have been flat across the industry for the last six months.
The results show the immediate impact of a range of short term cost management measures, says PwC, noting that 80% of fund management companies have taken steps to reduce and/or defer investment spend, while 75% have significantly reduced marketing spend.
Two in three firms have curtailed recruitment, while a third of investment managers have also launched new alternative investment products this year, generating higher fees.
However, PwC notes that the effect to date has been to hold costs at a level, albeit still higher than last year, rather than actually realise savings.
The advisor says that managers are now working to introduce more structural, sustainable improvement, with more than half introducing more sophisticated management information systems, undergoing product rationalisation, and pursuing more fundamental reviews of their operations.
One in three are actively pursuing outsourcing parts of their operations and a further 40% are considering this option.
PwC Consulting partner Graham Wright comments: "The 11th September highlighted in graphic terms issues which were already apparent within the fund management industry and were already being addressed. Most fund managers have now taken the relatively easy short-term steps to protect this year's profits. The challenge now is to make the right structural changes, for example, through product rationalisation and operational restructuring to lock in longer-term, sustainable benefits without constraining growth.
“Few have yet transferred the pain directly onto their staff; only one in four have so far implemented redundancy programmes. The big question that remains is the extent to which margins will be managed up through reducing discretionary bonuses. For most, no decision has yet needed to be taken, but most are actively reviewing bonuses for a decision at the end of the calendar year.”
The survey represents the results of 23 fund management organisations which together manage assets of over £1,100 billion.