European asset managers are bracing themselves for a “volatile” second half after this year’s big fall in markets has left them racing to protect their profitability and pivot towards faster-growing areas.
Almost all listed asset managers benefited from a rising tide of equity markets in 2021. However this year, their operating margins have come under pressure as markets have pulled back as global central banks have sought to tame inflation with sharp rate rises.
“The economic outlook is incredibly tough,” said Peter Harrison, chief executive of London-listed Schroders, which oversees £773.4bn in assets under management. “There are inflationary pressures that aren’t going to abate quickly and a war in Ukraine which isn’t going to end for a considerable while.”
Economic headwinds should result in markets remaining difficult, he added: “I think we’re in for a volatile second half.”
Valérie Baudson, chief executive of Amundi, Europe’s largest asset manager with €1.93tn in assets under management, said that since Russia invaded Ukraine in February “we have seen a higher risk aversion from clients”. She expected this trend to continue for the rest of the year.
Investment managers’ revenues are underpinned by the fees they charge on assets under management, which in turn are driven by market moves, currency swings and net flows from clients. During the first half of the year, both equity and bond markets sold off and some clients pulled money from funds as the uncertain macroeconomic outlook diminished their risk appetite.
Falling assets is putting cost-to-income ratios — a key measure of investment manager profitability — under pressure, especially for less profitable players.
Analysts say that this is likely to result in widening dispersion in the industry. Larger, diversified groups with exposure to faster-growing areas such as private assets, responsible investing and wealth management will probably fare better and have the firepower to continue to invest. Their more narrowly focused rivals will need to find to ways to cut costs and turn round struggling performance, according to analysts.
This dispersion was evident in half-year results reported this week. Schroders said that operating profit increased by 2 per cent to £406.9mn during the first half and it generated net new business of £8.4bn, boosted by strategic investments in private assets, wealth and pension fund solutions.
Amundi also benefited from the broad reach of its business. The Paris-based group garnered €5bn of new client money in the first half, as net inflows to its retail business and Asian joint ventures offset net outflows from treasury products and institutional clients.
At the other end of the spectrum, some groups faced particular headwinds, exacerbating challenging market conditions. Janus Henderson, the result of a merger between asset managers Janus Capital Group and Henderson Group five years ago, said that its assets under management dropped by 17 per cent in the second quarter to $299.7bn, lower than the $331bn the two combined oversaw following the merger. The group lost market share due to poor fund performance.
“We are diversifying the business into faster-growing areas like emerging markets and alternatives,” said Ali Dibadj, who joined Janus Henderson as chief executive last month. “Asset managers feel pressure when the markets are down, but that does not remove the need to invest for the long term.”
Meanwhile London-listed Jupiter said on Friday that assets under management dropped by a fifth in the first half of the year, to £48.8bn, driven by poor investment performance and £3.6bn in net outflows. Jupiter said it had paused hiring and non-essential investments until markets improve.
European asset managers’ share prices have come under broad pressure this year, but the groups with more diversified businesses have fared relatively better. Schroders has fallen 17 per cent this year, while Amundi has dropped 27 per cent. Janus, meanwhile has tumbled 40 per cent while Jupiter has shed half its value.
Meanwhile groups face a tension between managing costs while supporting staff who are feeling the pressure from the rising cost of living. St James’s Place, the UK’s largest wealth manager, said on Thursday it would pay employees who earn less than £32,500 a one-off bonus to help them through the rest of this year. Given higher inflation, it warned that it would probably miss its targets for keeping controllable cost increases at 5 per cent next year.
Despite the current market volatility, asset managers were more optimistic about the future. “The long-term growth trends of the asset management industry have not changed at all, they remain absolutely in tact,” said Amundi’s Baudson. She pointed to structural themes, including funding the retirement of an ageing population, a growing middle class in Asia and the need to finance the energy transition away from fossil fuels to renewables.
Additional reporting by Adrienne Klasa and Joshua Oliver in London, and Lydia Tomkiw in New York