EUROPE – Thirty-six percent of Europe’s asset managers will report negative profitability for 2002, projects management consultant McKinsey & Co. in its 2002 asset management economics survey.

The 2002 survey, which comprises data from over 80 European market participants with over 3.3 trillion euros in assets under management, looks at profitability based on 2001 results.

For this period profitability in the European asset management industry dropped by 48%. Only 10% of those questioned generated more than 30 basis points of operating profit, and 20% of participants were in the red.

According to the survey, revenues fell by 26%, due largely to “a shift from high margin sophisticated products to lower risk-lower margin products.” At the same time “costs increased by 4%, reflecting rising fund management costs and increased sales and marketing efforts to attract higher margin retail clients”.

Volumes also decreased as equity markets weakened, which could not be offset by positive net inflows of new money.

Says McKinsey: “From the period 1998 to 2001, total costs have increased by 3.7 basis points, while net revenues have fallen by 5.3 basis points.” Based on this data, and a further 40% fall in equity markets in 2002, McKinsey is forecasting 36% of European asset managers to report negative profitability for 2002, in the second quarter of 2003.

In terms of geographical variation, France’s asset management companies fared better than their European counterparts, maintaining industry profitability by stabilising revenues and keeping costs in control. Italy, Spain and Portugal suffered a 49% drop in revenues due to: a 3% decrease in assets under management; the increase of distribution costs from 69% to 77%, and a drop in management and performance fees.

Says McKinsey: “The UK showed profitability levels well below European averages, predominantly due to their focus on institutional rather than retail investors, as well as the difficulty in controlling fund management costs.” Germany, on the other hand, managed to maintain a higher level of revenues than the European average.

With regards to business strategy for 2001, asset management firms were still geared towards a growth environment. Says Andrew Doman, McKinsey director of the European Asset Management Practice: “Despite many messages to the industry that profits would plummet unless asset managers cut costs vigorously, the majority of players have failed to address this issue, and many of those that have, have not gone far enough.”

Commenting on the survey as a whole, said Doman: “Costs varied widely between players, even those with similar operations, suggesting poor management by some. One player had a cost base that was five times that of a top quartile performer. This suggests that there is huge scope for players to get costs under control. We need to see a much higher standard of professional management.”