Asset managers brace for tough year of cost-cutting in 2023

Global asset managers are facing a long-delayed reckoning in 2023 as falling assets force them to cut costs and make tough decisions about where to invest for growth.

Revenues were down across the industry last year, after a record 2021, as falling markets across almost all asset classes hit both management and performance fees. In the US, total assets in mutual and exchange traded funds dropped 17 per cent between the start of 2022 and the end of October, the most recent figures available from the Investment Company Institute showed.

At the same time, most money managers are under pressure to find money to upgrade their technology and win new customers. As a result, they are squeezing personnel costs through hiring freezes and bonus cuts in the hope of avoiding mass job losses. Consultants also reported a sharp uptick in requests for advice on “efficiencies”.

“There has been a lot of complacency. A lot of players now really need to get their act together,” said Markus Habbel, a partner at Bain who focuses on the sector. “If you don’t have scale, it is getting tougher.”

While the initial reaction to this past year’s turmoil has largely been generic belt-tightening measures and small across-the-board cuts, industry analysts predict that the coming year will require more strategic decisions.

“The temptation is to take a little bit off everything. In reality it doesn’t move the dial,” said Julia Hobart, partner in the wealth and asset management practice at Oliver Wyman. “Managers will need to decide what they will and won’t focus on. Big structural changes will need to be made to take costs out of the business.”

Jeremy Taylor, who heads Lazard Asset Management’s UK-based business, added: “What does an asset manager do as revenues go down? You tend to do less of what hasn’t worked over the past three to five years and put greater scrutiny on things that haven’t grown . . . you don’t give up on any scale product.”

In fact, the stronger asset managers are keen to press for gains while their weaker rivals are making cuts. “We continue to invest through the market cycle into long-running trends that are strategic priorities for us, including sustainable investing, alternatives, active management and exchange traded funds,” said Patrick Thomson, chief executive for Europe at JPMorgan Asset Management. “If you invest significantly into those trends through a downturn, it puts you at an advantage where others may have to cut back.”

Many asset managers are hopeful that bond funds, which saw big price drops and massive outflows as interest rates rose, will start to recover in 2023. “This is a mixed blessing for asset managers because you’re going to see flows come out of other higher-margin asset classes to lower-margin fixed income,” said Tom Mills, who analyses the sector for Jefferies, the boutique bank.

Some asset managers also predict the downturn will accelerate the shift by clients from traditional mutual funds and brokerage accounts to newer ways of investing, including ETFs, separately managed accounts and model portfolios.

“Whenever there are super shocks in the market, people make big changes to their portfolios. This is when people do deferred maintenance,” said Martin Small, who heads BlackRock’s US wealth advisory business and is the incoming chief financial officer. “In US retail markets, there is a move from brokerage accounts to fee-based advisory, that means more model portfolios and more ETFs.”

Asset managers spent 2021 and early 2022 snapping up providers that specialised in private markets and alternative investments, but dealmaking largely dried up amid the market turmoil. Share prices in the sector are sharply down: the S&P Composite 1500 Asset Managers index has dropped 23 per cent since the start of the year. Sellers are reluctant to accept those prices and potential buyers are not willing to pay more.

Philipp Koch, head of McKinsey’s European asset management practice, thinks continued pressure on costs might change the calculus, particularly in the second half of 2023. “Some players may conclude their business models are no longer sustainable and entertain more creative solutions for consolidation and M&A,” he said. “Most asset managers were on the buyer side . . . there were very few sellers — that might change.”

The pressures may simply be too much for some longtime players. “Whenever there’s a downturn, if it is a deep downturn, the players with weak hands get flushed out,” said Cyrus Taraporevala, who just stepped down as chief executive of State Street Global Advisors. “That’s just normal.”