It concludes that investment managers will continue to reduce headcount by around 10 percent (mainly in non-core roles) and costs (mainly in variable pay) by around 20 percent in order to return to profitability. Hugh Dougherty, head of manager research at Watson Wyatt, says: “This is clearly a difficult business environment for active managers and ‘people’ issues are likely to be superseded by ‘business’ issues as the principal concern of management, and chief among these will be consolidation, regulation and sustainability.”

According to the research, pressure on profits can be countered by adding new assets to the existing cost base, which will result in increased consolidation in the short-term. However, while the merging of entities can make business sense, paying too high a price in a falling market could also damage rather than enhance their sustainability. Dougherty says: “We have already seen several mergers, acquisitions, and firm closures over recent months, and we are expecting this trend to continue.

The nameplates of existing investment managers will 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.” Watson Wyatt is also predicting, along with many other observers, that government regulation of the funds management industry is likely to increase substantially, although banking will clearly be the most effected due to the bail-outs which have occurred in the US and Europe.

Tim Unger, head of investment strategy at Watson Wyatt in Australia says: “While we believe this prediction remains on track, the relatively clean hands of the funds management industry should mean an escape from additional regulation, but there is a chance that it gets caught by regulation aimed at banks, including a requirement to hold more capital. This would be a further blow to the industry as higher compliance and operating costs would further damage margins and challenge their sustainability.”

According to the new research, entitled ‘The Future of the Asset Management Industry’, there is little that institutional investors can do about consolidation in and regulation of the asset management industry, but among the actions they can take to prepare themselves for changes to its sustainability is to revisit whether the current extent of active management remains appropriate for their fund.

Other actions are to continue to diversify the manager line-up, renegotiate fees and terms, focus on sustainability issues and think through scenarios where certain eventualities could compromise the future performance of their managers. Dougherty says: “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.