GLOBAL - Increasing pressure on profitability and the drive by investors for improved fee terms will force active management fund houses to rethink their structures, fund ranges and company sizes to stay afloat, claims Watson Wyatt.
The consulting firm's latest Thinking Ahead Group research paper suggests even if markets were to improve now, most asset managers would still find 2009 to be a tough year and would have to look at whether they could continue in their existing form by perhaps moving away from consolidation and more towards boutique growth and diversification.
More specifically, Watson Wyatt said even if markets were to stabilise now, asset managers are likely to revenue levels at 30-50% below the start of 2008, so fee structures, if nothing else, will have to reconsidered and shift away from the ad valorem percentage of assets held.
The paper also noted staff costs can account for 50% of a firm's operating costs so the obvious move is to acquire more assets, though this is usually accompanied by staff cuts. And rather than worry key staff who no longer have access to the hedge fund market as a career development, firms might be more willing to consider investing in boutiques.
Whereas many asset managers are thought to be eyeing consolidation as a means of improving their asset bases and cutting costs in the short-term, Paul Trickett, European head of investment consulting at Watson Wyatt, said they are likely to see diversification into specialist managers rather than risk the prospect of paying too high a price in the downturn for merger with a rival.
"This is clearly an unstable business environment for active managers and 'people' issues are likely to be superseded by 'business' issues as the principal concern of management and chief among these will be consolidation, regulation and sustainability," said Trickett.
"We are expecting the nameplates of existing asset managers to change substantially during the next few years. While in the past there has generally been a bias against change in ownership, we need to consider that some of these changes could be materially positive for the survival of a firm," he continued.
The consultancy has found pension fund costs have risen by 50% in the last five years, to average 110 basis points for large funds compared to 65bp in 2002, and the bulk of this is now paid to external managers.
It therefore advocates firms "offer institutional clients a fairer deal" while advising investors to avoid adding "adversarial elements" to any arrangements, as they could be counter-productive, and continue to investigate whether passive management might be better-suited to the trustees' needs.
"We do believe that pursuing active returns is a worthwhile activity provided that the resources exist to have a competitive advantage in identifying, hiring and terminating active managers," said Trickett.
"Equally, we believe in the virtues of passive management and continue to advise that this is the more appropriate route for the majority of funds. That said, we are very mindful of the fact that passive management firms are not immune from many of the business issues facing active managers," he added.
Watson Wyatt will deliver its paper, The future of the asset management industry, in IPE's Top 400 supplement, as part of the July 2009 edition.