European asset managers are bracing for a “volatile” second half after this year’s sharp fall in markets prompted them to protect profitability and look to faster-growing areas.
Almost all listed asset managers have benefited from a rising stock market tide in 2021. However, this year their operating margins have come under pressure as markets retreat as global central banks have sought to bring inflation under control with sharp rate hikes.
“The economic outlook is incredibly challenging,” said Peter Harrison, chief executive of London-listed Schroders, which oversees £773.4 billion in assets under management. “There are inflationary pressures that are not going to ease quickly and a war in Ukraine that is not going to end for a considerable time.”
Economic headwinds are expected to make markets difficult, he added: “I think we’re going to have a volatile second half.”
Valérie Baudson, chief executive of Amundi, Europe’s largest asset manager with €1.93 billion in assets under management, said that since Russia’s invasion of Ukraine in February ” we saw higher risk aversion on the part of clients.” She expected this trend to continue for the rest of the year.
Investment managers’ income is supported by the commissions they charge on assets under management, which in turn are determined by market movements, currency fluctuations and net client flows. During the first half of the year, equity and bond markets sold off and some clients withdrew money from funds as the uncertain macro outlook reduced their appetite for risk.
Falling assets are putting cost-to-revenue ratios – a key measure of investment manager profitability – under pressure, especially for less profitable players.
Analysts say this will likely lead to wider dispersion in the industry. Larger, more diverse groups with exposure to faster-growing areas such as private assets, responsible investing and wealth management are likely to fare better and have the firepower to keep investing. Analysts say their more narrowly targeted rivals will have to find ways to cut costs and turn around struggling performance.
This dispersion was evident in the half-year results published this week. Schroders said operating profit rose 2% to £406.9m in the first half and generated net new business of £8.4bn, boosted by strategic investments in private assets, wealth management and pension fund solutions.
Amundi also benefited from the broad reach of its business. The Paris-based group raked in 5 billion euros of new client funds in the first half, as net inflows into its retail businesses 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 difficult market conditions. Janus Henderson, the result of a merger between asset managers Janus Capital Group and Henderson Group five years ago, said its assets under management fell 17% in the second quarter to $299.7 billion, lower than the $331 billion the two oversaw together after the merger. The group lost market share due to the poor performance of the fund.
“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 markets are down, but that doesn’t take away the need to invest for the long term.”
Meanwhile, London-listed Jupiter said on Friday assets under management fell by a fifth in the first half, to £48.8 billion, due to poor investment performance and 3.6 billions of net outflows. Jupiter said it suspended non-essential hiring and investment until markets improve.
Share prices of European asset managers have come under heavy pressure this year, but groups with more diversified businesses have fared relatively better. Schroders has fallen 17% this year, while Amundi has fallen 27%. Janus, meanwhile, fell 40% while Jupiter lost half its value.
Meanwhile, the groups face a tension between managing costs and supporting staff who are feeling the pressure of the rising cost of living. St James’s Place, the UK’s biggest wealth manager, said on Thursday it would pay employees who earn less than £32,500 a one-time bonus to help them through the year. Given rising inflation, he warned he would likely miss his targets of keeping cost increases controllable at 5% next year.
Despite the current market volatility, asset managers were more optimistic about the future. “The asset management industry‘s long-term growth trends haven’t changed at all, they remain absolutely intact,” said Baudson of Amundi. She highlighted structural themes, including financing the retirement of an aging population, a growing middle class in Asia, and the need to finance the energy transition from fossil fuels to renewables.
Additional reporting by Adrienne Klasa and Joshua Oliver in London, and Lydia Tomkiw in New York