The worst of the pain may be over for investors – assuming continued stabilisation of markets – but for fund managers the pain is only just starting, according to Watson Wyatt. And super funds should rethink their allocations to active management as a result.
While 2008 was tough for fund managers, with average earnings down 10-15 per cent, 2009 is looking worse. Watson Wyatt says in a report, ‘The Future of the Asset Management Industry’, that managers are starting 2009 with revenue ‘run rates’ perhaps 30-50 per cent below the start of last year.
“If markets are flat then asset manager earnings in 2009 will be much lower than in 2008,” the report says.
In the UK, managers either have already or are in the process of reducing their headcount by about 10 per cent and total costs by about 20 per cent. In the US, it is a similar story. For hedge funds, the headcount is down about 20 per cent.
One of the implications for pension funds is that they need to pay more attention to business issues of their managers. And big is not necessarily beautiful. Watson Wyatt says there will also be great boutiques in the future.
“The key is for the manager to have the scale appropriate to what they are trying to achieve and to have the cost base appropriate to that scale. Sustainability is therefore about the way the business is run, not just the size of the firm.”
Watson Wyatt says funds using active management should widely diversify the number of managers, but the consulting firm, which has previously railed against high manager fees, says in this report that it is hesitant to recommend lower fees in aggregate.
“Seeking to reduce asset manager fees when they are already under significant profit pressure is likely to have consequences. … At best such action could prompt a rationalisation of the industry and improve the value proposition for asset owners. At worst it would inflict chaos on the industry and introduce an unhelpful adversarial element to relationships.”
Another course of action for pension funds is to possibly revisit their active/passive split. Watson Wyatt believes in active management as long as the funds have the resources to identify and oversee those managers. Equally there are virtues in passive management and because of macro issues (such as there being too many active managers for the available alpha) the researchers “continue to believe (passive) is the more appropriate route for the majority of funds.”