24 October 2013

Fitch: EU asset managers face growing margin pressure in 2014

Fitch Ratings expects the number of products available to investors to shrink as fund managers counter this by focusing on cost reduction, especially among managers that are subsidiaries of larger financial groups.

The average margin on European fund managers' assets under management slipped to 40 basis points in 2012 from 44bp in 2010. This drop, while not huge, illustrates the long-term risk of margin pressure.

This decline has been partly driven by a shift away from high-fee equity products. Fitch believes it is likely to continue due to an increasing shift among institutional investors towards passive investments. Margins will also decline as retail investors move towards low-cost products, such as exchange-traded and target date funds. The trend is structural, even if a renewed investor interest in equity may temporarily boost margins.

Competition is also likely to intensify in Europe because of the relative openness to foreign managers, who are attracted by the efficiency and simplicity of the UCITS fund framework. This has already proved a strong draw for US managers but is also starting to attract Asian and Latam-based managers.

Margins are particularly low in the captive institutional segment, which is big in Europe and mainly comprises assets managed for parent insurance companies. Fees are on average half those charged to third party institutional investors. This is unlikely to change in a low government-yield environment. These pressures will lead to further rationalisation of the industry as firms aim to manage fewer, bigger funds. Around 1,000 funds were eliminated in 2012 and the industry is on track to hit a similar number in 2013. 1,000 funds, however, only represents around 3 per cent of the total number in Europe. As many as 65 per cent of cross-border fund ranges do not have a single flagship with assets of more than €1 billion.

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