The Dirty Secret of Asset Management: It’s Doing...Okay?
Asset managers have been predicting a bleak future. But first-quarter results showed the continued power of their business model.
Asset managers that run traditional stock and bond funds suffered far less than many investors in the first quarter.
The median revenue at traditional publicly traded asset managers declined 6.7 percent in the first quarter of 2020, according to an analysis by Casey Quirk, the asset management strategy consultant that is part of Deloitte. The Standard & Poor’s 500 stock index fell almost 20 percent in the first quarter as economies around the world shut down in response to the coronavirus.
Amid the shutdown, asset managers shelled out less to keep their businesses going. Operating expenses fell 3.9 percent, according to Casey Quirk, which analyzed 19 firms with approximately $16 trillion assets under management.
Investors also stayed put. Net flows declined less than 1 percent, with retail investors representing most of the outflows, according to the consultant. Operating margins declined 1.9 percent for the median firm.
With markets rising during 2019 and into early 2020, asset managers had a positive quarter when compared with the year-earlier period. Median revenue of public asset managers in the first quarter of 2020 increased 3.9 percent over the same period last year; operating expenses declined 5 percent, and margins increased 5.5 percent. Assets under management rose 4.1 percent year over year.
“Comparing Q1 of this year versus Q1 of last year, both revenues and margins were up in that timeframe,” said Amanda Walters, a principal at Casey Quirk, in an interview. “We saw a decline in March, then a market rally. In the global financial crisis, markets continued to decline for months on end. There was a much bigger impact on managers’ financials. If this market rally continues, perhaps the worst of the hit to asset managers’ bottom lines could be over.”
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Asset managers have been facing headwinds for years as investors have traded in their actively managed stock funds for cheaper passive strategies and as new pools of money to be managed have been tapped out. Walters emphasized that despite the good first quarter results, those challenges remain, along with rising operational and technology costs and pressure on fees.
“Those things are still top of mind, but for the last few months firms have focused on the crisis response,” she said.
Now asset managers are thinking through other issues, such as the long-term implications of employees working from home. Asset managers are also evaluating how to continue to engage with clients through platforms like Zoom and whether there are more innovative ways to effectively communicate remotely longer term. They’re also analyzing whether they need more or less physical space and where their offices should be located.
“There’s one school of thought that we’ll never go back. People want flexibility,” Walters said. “But there’s another school of thought that people want flexibility and also want to have office space. In that case, maybe you need more space than before, because of the pandemic.”