Active investment managers are facing a world of pain even after the markets begin their long slow recovery, according to a new analysis issued by consultancy firm Watson Wyatt.
The analysis, released by Watson Wyatt this week, also suggested that the pressure generated on the active management firms this year is likely to cause considerable change within the investment management sector.
The head of manager research at Watson Wyatt Australia, Hugh Dougherty, said active investment managers were starting the year with revenues between 30 per cent and 50 per cent below 2008 and potentially even worse earnings for 2009 unless investment markets improved substantially.
“If returns stabilise now, then for super funds and other institutional investors the worst of the pain is over, but for investment managers the pain is just starting,” he said.
Dougherty’s view is based on the Watson Wyatt research, which suggests the ad valorem fee basis, upon which the industry is centred, means that profits will remain under pressure as long as market returns and new inflows remain low and while there is little appetite for raised fees.
The research concludes that investment managers will continue to reduce head count by around 10 per cent and costs by around 20 per cent in order to return to profitability.
“This is clearly a difficult business environment for active managers and ‘people’ issues are likely to be superseded by ‘business’ issues as the principal concern of management, the chief among these will be consolidation, regulation and sustainability,” Dougherty said.
He said there had already been several mergers, acquisitions and firm closures in recent months and this was expected to continue.
“The name plates of existing investment managers will change substantially during the next few years,” Dougherty said.
“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.”
