Profits at European fund managers look likely to fall by almost 6 per cent this year, adding to pressure on investment companies to cut costs and reduce staff.
The profit pool for Europe’s mutual fund industry will shrink from €79bn in 2018 to €74bn this year, according to an analysis by Prometeia, an Italian consultancy that has analysed data from more than 40,000 funds.
Increased competition on price, outflows from actively managed equity strategies and the shift by investors into low-cost passive trackers are expected to bite into industry earnings.
Prometeia forecasts that net investor flows into European funds will halve from €94.8bn last year to €46.2bn in 2019. Profit margins, measured as share of assets, are predicted to shrink from 79 basis points to 72bp.
Prometeia also cautioned that profits could experience a more severe decline of about 8 per cent if equity and bond markets delivered muted returns, which would lead to further weakness in new business inflows. A market correction would lead to an even larger fall in profits.
Active equity funds, the most lucrative products for managers, are expected to bear the brunt, with investor withdrawals leading to a decline of about 10 per cent in profits for those fundsthis year. Earnings from multi-asset funds and unconstrained funds that aim to replicate hedge fund strategies are also expected to decline.
“Active managers need to deliver more added value to justify their pricing premium in the current low interest rate environment, where they face increasing competition from passive strategies,” said Claudio Bocci, a partner and head of asset management at Prometeia.
Investor appetite for both equity and fixed income passive funds is increasing steadily but these low-cost trackers represent less than 5 per cent of the European industry’s profit pool.
BlackRock, the world’s largest asset manager, has established a dominant position as the biggest provider of passive strategies in Europe. BlackRock’s success in attracting tracker fund inflows has, in effect, shrunk the pool of new business available to rivals.
Funds that incorporate environmental, social and governance metrics are predicted to experience strong demand and increased profits in 2019.
“ESG strategies are really taking off with an increase of around 44 per cent in their assets under management since the start of last year. That is also translating into higher profits from ESG for asset managers,” said Mr Bocci.
Disappointing results for the first half of 2019 have already been reported by Schroders and Standard Life Aberdeen, which announced declines in pre-tax profit of 14 per cent and 10 per cent respectively. Amundi reported flat pre-tax profit in the first half, while Legal & General Investment Management posted a 1 per cent increase in first-half operating profit.