The U.S. investment management took the hardest hit when it came to layoffs during the 2000-2002 bear market, according to a just released study. Yet, the U.S. firms expect that the worst of the downturn is behind them. U.S. investment managers cut 20 percent of their staff costs during the bear market compared to an 18 percent cut by European managers and only a 12 percent cut in expenses among Asian firms, according to figures compiled by KPMG
Those cuts have already contributed to a stronger bottom line for the investment management industry in 2003, according to the study released this week by the two consulting firms. While 40 percent of the firm's surveyed said last year that they expected to lose money in 2003, only half that amount actually reported a loss, according to the survey. The study looked at 300 investment managers in 29 countries, including 90 of the largest 100 firms in the world.
While the sample covers all types of investment managers from around the world and not just those deriving their business from U.S. registered investment companies, it does hint at opportunities for both smaller investment managers and those providing outsourcing.
The major issue facing investment managers today is how they can restructure their business to remain profitable throughout the up and down swings in asset markets. KPMG and CREATE point to the oil industry in the second half of the eighties as another sector faced with a similar issue of needing to match costs with variable revenues.
To do that, they predict that investment managers will attempt to rationalize their people and infrastructure capability to a base level. If demand moves beyond that level growth would be accommodated by productivity improvements and creative engineering.
So far KPMG and CREATE are aware of just "one or two" firms implementing this approach, according to the study.
Yet, most investment managers are taking the initial steps of outsourcing work and building alliances, both trends that should benefit the bulk of the 600 U.S. fund advisors. Larger investment managers, for example, are focused on ways to deliver alpha to clients yet are faced with the problem of building close-knit investment teams in a corporate environment. While some firms are attempting to develop a team-based culture in their investment management group, others are turning to subadvisors. Those searches should benefit smaller, boutique shops that have the small company, team-based feel through the genuine virtue of actually being a small company.
As expected, many investment managers are also seeking to outsource administration. Indeed, KPMG and CREATE found that 35 percent of firms expected to outsource custody over the next two years and 26 percent plan to outsource settlement. But it is not just administration that firms are seeking to outsource.
Ten percent of investment managers said they will outsource advertising in the next 24 months. Small percentages (fewer than five percent) also said they would outsource brand promotion and product development.
More Focus on Intermediaries
Advisors and intermediaries are where the action is. When it comes to sales and marketing 60 percent of investment managers said that distribution through intermediaries is a current top priority. That was followed closely by "direct sales" at 40 percent, "white labeling" at about 20 percent and "sales via fund supermarkets" at just under 20 percent.
On the marketing side, firms remain focused on customer relationship management (75 percent) and product development (60 percent). Coming in a distant third is brand management (30 percent). Only a handful of firms (fewer than 5 percent), said that advertising is a top priority.
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