The FCA’s market study is likely to place “further pricing pressure” on asset managers, according to Numis analyst David McCann.
The regulator announced the scope of its study into competitiveness in the asset management industry earlier this month, ahead of a year-long investigation proper.
Asset managers’ ability and willingness to control costs, as well as the way they compete to deliver value, will be among the topics under the spotlight, according to the FCA.
The regulator also noted in its terms of reference that fund manager fees appear to have clustered around the 1.5 percentage point mark on an unbundled basis. This meant charges would likely come under closer scrutiny, suggested Mr McCann.
“It is rare… for any regulator to carry out a comprehensive review and conclude that everything is fine. We therefore think it is prudent to expect various new measures that could place current prices under pressure.
“The study may ultimately accelerate the existing trend of pressure on margins,” he added.
Mr McCann did note that the high levels of profitability currently seen in the sector are subject to one mitigating factor: they are being achieved in “benign” market conditions.
“In part, [these margins] are to reward shareholders/staff for exposure to a highly cyclical revenue line,” he said.
The broker did, however, understand why the FCA may think competition worthy of analysis, given the sheer size of margins as they stand.
The FCA estimated in its terms of reference that average operating profits for asset managers equate to roughly 35 per cent of revenues. Numis’ analysis of listed fund groups, meanwhile, suggests an average management fee earnings margin of around 38 per cent, with total margins higher still.
One unintended outcome of the review, the broker added, might be an increase in merger and acquisition (M&A) activity, which has become a fixture of the sector of late – because the study will underscore what Numis sees as a trend for lower organic growth margins.
“We had already been anticipating relatively modest organic profit growth for most asset managers, which combined with relatively high earnings multiples, has underpinned our generally cautious stance.
“If we are right, then ironically this low organic profit growth could lead to intensified sector M&A activity (ie, fewer competitors), as [chief executives] increasingly look to acquisitions/cost synergies to achieve profit growth.”
Nonetheless, the industry is well placed to withstand fund fee compression, the broker concluded – implying fees are too high as it stands.
“We do not think further pricing pressure would spell disaster for the industry. In fact, we still expect it to remain a lucrative ‘cash cow’ for both shareholders and employees,” Mr McCann said.
“However, being realistic, we think shareholders and employees should expect an environment of low growth for earnings/pay for the foreseeable future.”
