Fewer Funds and Lower Margins: the Future of European Asset Management

(October 2, 2013) — Asset managers operating in Europe will have to ramp up a rationalisation programme of funds they began two years ago and concentrate on reducing expenses as margins creep down, according to Fitch Ratings.

Independent fund houses are in a better position than those attached to larger financial institutions, according the firm’s research arm, due to higher margins on fund sales and fees.

“Independents have, in general, higher assets under management (AUM) margins than asset managers that are subsidiaries of other entities,” Fitch’s report said. “Three-quarters of the independents in Fitch’s sample had a blended AUM margin in excess of 40bp, while only around one quarter of the subsidiaries had an AUM margin above that level in 2012.”

However, these independents are more likely to fall victim to changes in investor sentiment towards certain asset classes, Fitch noted.

“A number of subsidiaries exhibit lower AUM margins (below 30bp) and higher cost/income ratios (above 70%), which together result in relatively lower profitability,” the report said. “In recent years, subsidiaries have not managed to increase AUM margins, reflecting stable product mixes and the relative inability to grow significantly AUM in higher margin specialties.”

One area that is hampering profitability in the sector is a proliferation of seemingly unnecessary funds and a downsizing of fund ranges that began after the financial crisis. This needs to speed up to gain better efficiency in the industry, Fitch said.

“In the first half of 2013, the European fund industry “eliminated” around 500 funds on a net basis, after 1,000 in 2012, mainly through fewer fund launches. But it only represents 1.5% of the total number of funds in Europe. Furthermore, the effort is still too marginal to help building critical mass. There are still 65% of cross-border fund ranges without a single flagship fund of more than €1 billion of assets.”

Although the outlook for European fund managers is not dismal, there will have to be changes in certain business models, Fitch advised.

“With changing market conditions and investor demand, business diversification and a clear marketing strategy capable of anticipating cycles will be increasingly important considerations.”