Investment Managers to face pressure throughout 2011

Filed in Asset Management

As most investment manager’s performance and stock price is tried strongly to the trends in the overall equity and fixed income markets, it is my believe that the remaining months of 2011 and into 2012 are likely to be quite rocky and could signal a an important turning point in the industry.

Background:

According to S&P research, year to date through February 28, the S&P Asset Management & Custody Banks Index rose 3.3%, versus a 5.6% increase for the S&P 1500 Index. While in 2010, the sub-industry index was up 12.5%, compared to a 14.2% increase for the S&P 1500 Index. The under performance of the asset management industry versus the S&P 1500 largely mirrors how AUMs levels have trended – average assets under management remain higher than they were in March 2009 at the market bottom, but continue to remain below peak levels for the majority of asset managers.

Getting out while the getting is good?

While a continued global economic recovery could benefit asset managers, it is my premise that the whole investment management industry is likely to face pressure not unlike what was experienced from 2007 – 2009.

So what could go right? Global financial markets are becoming increasingly complex and integrated, benefiting global investment managers who have the capability to offer international investments and advanced financial instruments to a much broader client base than is available in just the United States.

However, the potential trouble facing equity and fixed income markets could put a world of hurt on investment managers:

The FED is widely expected to end their quantitative easing II (‘QEII’) program the middle of 2011 which has artificially propped up equity prices
Europe still has a sovereign debt problem which has not been systematically resolved
The US continues to face high levels of unemployment and now increased commodity inflation

The troubles listed above are just the tip of a potential iceberg:

Retail investors could get spooked by market volatility after only recently starting to invest in domestic-US equity mutual funds again. Many retail investors missed the 100% rally off the March 2009 bottom and are now playing catch-up to the “smart money”
Hedge funds could get caught with bad derivative positions, greatly hurting institutional clients who have increased their hedge fund allocations in the last year

Just 1 or 2 of the troubles listed above coming to fruition will mean that the upwards ride for investment managers’ AUM could be coming to an end shortly.

Is a Turning Point is Coming?

Should equity and fixed income markets sell off in the coming months, investment managers as a whole are likely to drop even faster than the overall market since they underperformed on the way up from 2009 – 2011. Such a sell-off in asset prices, coupled with the lowered share prices of investment managers themselves could be the impetus for a wave of industry consolidation.

It is likely that some investment managers who have a low level of assets under management and have not seen increased sales and client retention over the last two years will be forced to look to their stronger competitors for a merger. The question at that point will be, who are the buyers? Blackrock is still digesting their iShares purchase from Barclays (‘BGI’) and many investment banks were forced to sell-off their asset management arms over the last two years.