U.S. investment managers are making radical cost cuts – on average 22% – in response to plummeting asset values, according to a new survey by Greenwich Associates’ Competitive Challenges.
The study results reveal that U.S. investment managers’ portfolio assets declined in value by an average 31% in 2008. Small firms have been particularly hard hit by these declines due to deteriorating economies of scale, but even large firms have been forced to minimize costs to maintain effective scale.
Every one of the 47 U.S. asset management CEOs, COOs and CFOs participating in a December survey said their firms experienced asset declines in 2008. Total declines on the year ranged from a low of 2% to a high of almost 67%.
This performance has had a significant impact on manager revenues: Investment managers are projecting an average revenue decline of almost 33% from 2007 levels by the end of 2009. Some of the worst hit firms expect 2009 revenues to decline more than 43% from 2007 levels.
“Instead of cutting costs in line with revenues to reach ‘normal’ profitability, most firms are trying to position themselves for a rebound in the markets and cutting less in client-facing and investment areas,” says Goran Hagegard, Greenwich Associates consultant. “This effectively means accepting lower margins in the short-term. Firms project operating margins to fall an average of 37% in 2009 from their 2007 levels.”
Firms reporting that they are taking active measures to cut costs are targeting an average 22% cost reduction by the end of 2009 compared to their 2008 budgets. Only a relative handful of managers are attempting to weather the storm without major expense reductions. Across the industry, asset management firms are looking to reduce 2009 budgets by about 14% from the 2008 forecasted expense level.
Most managers are targeting non-investment departments with these cuts. Approximately three quarters of the firms cutting costs are targeting support services and/or investment operations, and about two thirds are targeting distribution and client services and/or information technology.
“More than half the firms say they are targeting executive management, and this expense category could experience some of the deepest cuts,” says Chris McNickle, Greenwich Associates consultant. “More than 30% of the firms looking to reduce executive management expenses say they plan to cut these costs by 15% or more, and an additional 17% say are looking to cut 30% or more.”
Key to managers’ cost reduction efforts will be an average 29% reduction in bonus expense from 2007 to 2008. In addition, about half the firms surveyed said they are reducing headcount. Firms taking that step have eliminated or are planning to eliminate almost 11% of employees on average.
Despite these aggressive steps, declines in revenue are expected to outpace expense reductions, leading to lower operating profits in 2008 and 2009. Margins for 2009 are projected fall 37% from than those reported in 2007.
The U.S. asset management firms participating in the Greenwich Associates survey together represent approximately $3.2 trillion in assets under management. Thirty two percent have assets under $10 billion, 47% have assets of $10-100 billion, and 21% have assets greater than $100 billion.
D.C.