Asset management: higher rates and volatile markets pile on the pressure

Asset managers have sailed on a rising tide of wealth in recent years. An equity bull market buoyed assets under management and swelled fees. But the conditions that helped markets cruise to record highs have hit an iceberg.

Rising interest rates, stubbornly high inflation and the worst start for stocks in half a century mean fund managers big and small will see a sizeable hit to their earnings this year.

Even BlackRock, the world’s largest money manager, is not immune to a downturn. Consensus forecast expects the group’s net income to fall 11 per cent this year. Those at smaller rivals T Rowe Price and Invesco are forecast to drop by an even steeper 27 per cent and 38 per cent respectively.

BlackRock set the tone last week after reporting a decline in second-quarter net earnings of more than a fifth to $1.1bn as assets under management (AUM) shrank 11 per cent to $8.5tn. The asset management arms at State Street, JPMorgan and Morgan Stanley have also disappointed.

Fund managers are trying to balance diminishing top lines with rising costs. Never mind the shift to passive products, declines in AUM reduce fees. This comes after several years of increased hiring. For Franklin Resources, overheads as a proportion of revenues have climbed 300 basis points over the three fiscal years to September. Others such as T Rowe Price have added to staff numbers while pushing down this costs ratio in recent years.

The biggest fund managers will be fine. Although total assets at BlackRock fell during its most recent quarter, this was mainly due to the performance of the stock market. Its net inflows rose $90bn during the period. Having an industry-leading passive investment franchise like iShares helps. The company’s technology division is another bright spot. Aladdin — its portfolio management technology platform — helped drive a 5 per cent rise in the unit’s revenue.

Smaller firms, on the other hand, will be in a more painful spot. Pressure to consolidate will grow.