Analysts have warned that the Financial Conduct Authority’s proposed all-in fund fee poses a biggest risk to asset managers’ margins.
Although the industry avoided the worst case scenario of being referred to the Competition & Markets Authority, the all-in fee, coupled with the confirmation of a consultation into platforms provides uncertainty and will damage profitability.
In a bearish note on the sector following the release of the FCA’s final study on the fund market, Bank of America Merrill Lynch said it believes that Hargreaves Lansdown, Jupiter and Schroders will be among the companies most exposed.
‘The suggestion of a single “all-in-fee” implies ongoing fee pressure for the industry, negative for Jupiter [and] Schroders,’ said BoAML analyst Juliette Nichols.
‘Notably however, there is no referral of the asset managers to the Competition & Markets Authority – albeit we would argue that this potential “worse case” outcome (and in fact even today’s more “inline” outcome) is far from being reflected in share prices of the UK asset managers, which have been very resilient versus the UK market.
Nichols has maintained a ‘sell rating’ on both Jupiter and Schroders. She said Jupiter is the most vulnerable to regulatory pressure, given its high fee margins of 87bps, gearing to UK clients, at 78% of assets under management (AUM), and 90% retail exposure.
‘We forecast 2-3bps per annum fee margin compression driven by competition and mix. We think strong demand for fixed income relative to core active equities will continue to pressure margins as the former's margins are ~20% lower,’ she said.
‘Moreover, we see negative mix impact if Merlin assets continue to decrease, given their high fees (~90bps) and mixed fund performance. Fund of fund assets (including Merlin) have about £8 billion of AUM (~20% of total) and fell 6% YoY in 2016. We expect these assets to decrease further.’
Nichols noted that Schroders has greater geographic diversity, but is set to lose a £5.6 billion mandate later this year, which equates to around 1% of AUM. She added that Schroders’ margins are also around 25bps lower than the industry average of 70bps.
Jupiter’s share price was up 0.59% at 496.3p with Schroders down -0.16% at 3,099p at 10:27am. Shares in Hargreaves have taken a bigger hit, down 2.39% to 1,305p, however.
Nichols reiterated her sell rating on the stock, saying the announcement that the FCA is to carry out a consultation in platforms is ‘incrementally unhelpful’.
She added: ‘We’d see this as a particular negative for pure-play platform operators such as Hargreaves Lansdown, where we have had consistent concerns on risk to earnings per share given charges and the potential for increased competition.’
Alliance Bernstein analyst Edward Houghton also reiterated his negative rating on the stock this morning, saying: ‘We believe Hargreaves Lansdown is the most exposed to this; we rate the stock underperform with target price 1160p.’
Elsewhere, Moody's said that cost management and economies of scale will become a priority for asset managers, translating into market consolidation.
In a report, it highlighted that big players with diverse solutions in both active and passive management such as BlackRock and Legal & General Investment Management, will be better positioned to respond to 'building regulatory and market pressures'.