Either stoically optimistic or complacent, the executives of funds management businesses do not believe the financial crisis will threaten their businesses, force them to overhaul their investment strategies or cut headcount, an analysis of a global survey of funds managers by FS Associates finds.
The survey, entitled The Global Money Management Industry’s Response to the Financial Crisisand issued by FS Associates, a consultant to funds management businesses, collected responses from nearly 80 boutique and large multi-asset management firms predominantly based in the United States, Canada, Europe and Asia. All firms ran institutional money and held a minimum of $500 million under management, and submitted responses in the first 10 days of November 2008. None were hedge funds or private equity firms.
FS Associates found none of the respondents thought their business would be in a worse position after the crisis than before it hit. In the zero-sum game of funds management, this consensus opinion was “far too optimistic,” the researcher writes.
As much as 82 per cent of respondents said they would be stronger than most of their competitors, while 18 per cent predicted they would be no worse or better off than their industry peers.
“While it is not new to us that money managers have the tendency to overstate their capabilities, we did not expect to find 82 per cent of the firms participating stating that their strategic measures taken to cope with the financial crisis would allow them to be better positioned than their competitors.
“It can be expected that few managers would want to predict that, despite their best efforts, they will come out on the losing end.”
FS Associates noted that this optimism could hinge on their stated commitments to retain talent during the crisis, rather than laying staff off during the down trend.
Even as assets for most managers have shrunk during the turmoil, 26 per cent of respondents said their businesses were adding staff, while 49 per cent said they had not made, or expected to make, significant headcount changes. Just 9 per cent said they had already cut headcount.
FS Associates saw these results as “another sign that the industry has not yet fully recognised the negative impact the financial crisis may have on individual firms”. This unawareness could be due to cost-efficiency plans enacted as the crisis began to deepen, or, conversely, the full impact of the downturn on the profitability of firms had not yet sunk in.
If the surveyed firms were to increase headcount, 67 per cent said they would add investment management staff, while 56 per cent would focus on marketing and business development and 36 per cent address client services.
That manufacturing was flagged as an area of potential expansion surprised FS Associates, which felt that any shrinkage of assets under management should at least result in a freeze of fixed costs, such as investment research.
If the firms decided to cut roles, 74 per cent said they would zero-in on operations and administration departments first, while 43 per cent opted for investment management. FS Associates saw the concentration of lay-offs in one department as cause for concern.
“If headcount decreases are imminent, would they not be considered to be affected across the board?” the firm wrote, questioning whether it was in the respondents and clients’ best interests to gouge the back office while sparing other teams.
The indication that manufacturing roles would be cut before marketing positions suggested that strong “rainmakers” were considered more important to the viability of some funds management firms than manufacturers.
FS Associates concluded that the managers’ overall reticence to reduce headcount meant “the industry will need to become more realistic and thoughtful about trimming the fat”.
But headcount was not the only part of managers’ businesses that would apparently remain largely unscathed.
throughout the crisis. While a fraction – 1 per cent – saw that the crisis produced a ‘new era’ in funds management and demanded comprehensive changes to their strategies, 52 per cent said they may make minor changes to their processes and 47 per cent said there was no need to change.
FS Associates regarded these responses as “rational”, commenting that in early November 2008 it was “much too early to even consider revamping the process[es] now” as the crisis had not yet played out.
“One would not expect firms to alter their investment strategies altogether even in the face of an extended financial crisis… Both the investment philosophy and process represent the basic ingredients of a money manager’s pursuit to deliver above-average performance.
Managers in the US saw themselves as less likely to make changes, in contrast to European, Asian and South African firms, who were more accepting of change.
“Only time will tell if the responses from this survey reflect an unhealthy degree of complacency, or if the courage to see through these difficult times without changing course will be prescient.”
Most respondents were not prepared to say conclusively whether their attempts to capture new inflows would be done through strategic initiatives such as building alliances, joint-ventures or acquisitions of other money management businesses.
Responses varied across geographical regions. European managers eyed asset growth primarily through acquisitions while American firms considered strategic alliances, both domestic and offshore, as more lucrative. Asian managers saw better prospects in cross-border alliances.
But, since strategic objectives are usually set within a multi-year timeframe, the responses probably referred to tactics already in play, FS Associates wrote.
“However, the current environment should lead to new strategic, transaction-oriented opportunities, such as merger and acquisition activity and joint-ventures. Well-capitalised money management firms may find bargains in asset management entities in need of finding a strong partner with expertise and access to complementary client segments.”
In its analysis, FS Associates foreshadowed some trends that could change the business models of funds management firms. It did not foresee an “apocalyptical” collapse of the industry, and was confident that manufacturing processes will remain largely unchanged for most firms. But clients and their consultants will surely intensify due diligence of their managers’ portfolio risk, compliance matters and operational factors such as counterparty arrangements.
In order to attract or retain clients, managers would also be pressured to negotiate, or renegotiate, management and performance fees – by waiving or lowering performance fees or offering temporary rebates, for example. This would further compress profit margins for funds managers, FS Associates wrote.
Consolidation will occur in the future as stronger businesses absorb weaker ones, with cross-border merger and acquisition activity among firms being the dominant arena, enabling firms to expand their product offering and access new distribution channels.
