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Wealth managers must address their role in fund market oligopoly
by Jon ‘JB’ Beckett on Dec 03, 2013 at 11:58
It is well known dirty secret that the UK fund industry has been one of the most lucrative fund markets for more than 20 years. It has enjoyed the best of both worlds: the open competition of the US, allied to the higher fees of Europe.
A star manager culture has helped support higher charges and advisers bought in hook, line and sinker. Why else do you think so many large US fund managers came to the UK?
Many confuse funds under management (FUM) with profit or shareholder assets; the reality is that FUM is an input cost for asset houses. An asset business can run multibillion portfolios and still make a loss if its operating margin is wrong.
There is a term used in the fund industry but rarely openly discussed, it’s how much a fund manager can ‘sweat’ their assets (basically how much they can charge).
The implications of compressing fees are that large houses will be less able to sweat assets in future as margins fall. What are the signs – are the revenues of the larger houses going up or down?
Schroders reported £315 million in net revenue in Q3 2013, up from £246 million in Q3 2012. Excluding the addition of acquired Cazenove assets of £27.2 billion, Schroders’ assets over the same period went from £212 billion to £229.5 billion (£12 billion in investment returns and £5.5 billion in inflows).
That works out as £728 revenue for every £1 million assets in Q3 2013, compared to £846 revenue for every £1 million assets in Q3 2012.
Admittedly some of the earnings from the asset growth will have yet to be realised at the reporting date, but generally speaking earnings appear to be going up but at a slower rate than FUM. Looking at the earnings results of a few of the other IMA premiership revealed similar stories.
Now the UK market is going through the biggest reform since polarisation with the retail distribution review (RDR) and rising scrutiny over fund fees.
I suspect if the government weren’t looking into such a long-term savings abyss then it would be quite happy to keep the status quo and keep the taxes coming through the square mile.
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