Asset Managers Face Continued Pressure on Profitability

Alternatives firms were a bright spot, with some growing their headcount while traditional managers freeze hiring, according to Casey Quirk.

Illustration by II

Illustration by II

Listed managers continued to post declining profits and assets under management as the industry battles with a turbulent market and inflationary pressures.

The median traditional manager suffered a 5 percent drop in earnings and a 6 percent slump in AUM in the third quarter of 2022, compared to the second, according to a Casey Quirk analysis of 18 listed asset managers in North America released Thursday. Asset flows were also down 0.5 percent for the third quarter. Year to date, the median revenue and the median AUM of the 18 managers decreased 18 percent and 20 percent, respectively, according to the report.

In the first and second quarters, poor capital market performance led to an immediate decline in assets and earnings. Managers in the bottom quartile have been squeezed even harder as the gap between the most and least profitable managers grew wider.

“2021 was certainly a phenomenal year,” said Scott Gockowski, senior manager at Casey Quirk. “You saw quite a lengthy run-up in equity prices over the prior few years.”

According to Casey Quirk, inflation played a big role in the declining earnings and AUM seen last quarter. Median general and administration costs rose 7 percent in the third quarter compared to the same period last year, according to the report. Areas like marketing, technology, and market data have been affected the most by surging costs. Compensation, however, stayed largely flat during the third quarter, since that’s linked to capital market performance to some extent.

“We expect persistent declining revenues in the first three quarters of the year to put pressure on asset managers’ 2022 year-end bonuses and full-year profits,” Gockowski said. But he added that the market rebound in the fourth quarter could improve profit margins for some managers.

The performance of alternative managers has emerged as one of the few bright spots in the third quarter. According to the report, the median revenue of alternatives firms was up 4 percent in the third quarter, compared to the second. Net flows also grew 2.2 percent. Some alternatives firms are even growing their headcounts in the difficult market, while 22 percent of traditional managers are under hiring freezes, according to Casey Quirk.

The outperformance of alternatives managers is due in part to the rising demand for non-traditional investment products such as private credit and infrastructure, according to Gockowski. Also, because private market assets aren’t marked to market on a daily basis, they’re more desirable for some investors because they can report higher risk-adjusted returns, he said.

“With [fewer assets] marked to market, the overall portfolio can look better,” he said. “It’s a widely understood phenomenon across market participants. Most institutions…have [become comfortable] dealing with it.”