European Fund Managers Face Regulatory Costs
European asset managers will spend between $900 million and $1.5 billion over the next three years, exclusive of headcount, to comply with new regulations according to research from BNY Mellon.
The study, “The Impending Profitability Challenge for European Fund Managers”, carried out with EY, said this equals a “conservative” 3% increase in cost/income ratios over the next three to five years.
The report said most European fund managers firms cut costs in response to the credit crunch and cited Schroders, which increased operating margin from 27% in 2009 to 36% in 2011 from cost reductions. BNY Mellon said: “While this scale of cost compression is impressive, further reductions within business models will be harder to find, with extended lead times.”
As a result BNY Mellon expects more consolidation with banks continuing to sell their asset management arms to large independents.
The firm recommended four strategies for fund managers to meet the increased regulatory costs:
1. Be cruel to be kind : review product portfolios and develop more sophisticated mechanisms for identifying “products to kill” versus “products to invest in”.
2. Shared solutions to common problems: deepen outsourcing/off-shoring to improve future flexibility, especially in the middle-office.
3. Think outside the box of traditional cost-cutting: explore cost reduction programmes such as tax and smart buying efficiencies.
4. Leave no stone unturned: rapid identification of cost reduction initiatives in non-traditional areas such as communications.
In the U.S., analysts at KBW this week increased their earnings per share estimates on fund managers by 3% to 4% on average for 2014 and 2015 as equity markets performed well and fixed income generated flattish returns in the third quarter.
The analysts said in a report that equity investors remain nervous and are likely to focus on global, dividend and other income, as well as asset allocation strategies.
KBW said: “We think fixed income demand for bank loans, global, and credit-driven strategies will also enjoy relatively better demand than more plain vanilla and more rate sensitive strategies. In particular, we believe demand for for muni fund strategies remains poised to pick up noticeably.”