European asset managers’ revenues declined 9% compared to the second half of 2019, according to an industry-focused report by Moody’s.
As part of its Asset Management – Europe study, the research and ratings firm said this decline reflects the sector’s weaker-than average assets under management in the first half of 2020.
Combined assets of the firms surveyed fell 1.5% to €10.4tn, compared to the end of 2019. Moody’s added that the decline reflected a steep market downturn in the wake of the onset of Covid-19, which was largely offset by a central bank-assisted rebound.
Asset managers’ margins have also been impacted, going down from 30% average earnings before interest, debt, tax and amortisation (Ebidta) margin in the second half of 2019, to 27% in the first half of 2020.
Ups and downs
Within firms that Moody’s monitors, Legal & General Investment Management (LGIM) showcased positive dynamics when it comes to the overall asset base, having attracted 4% more than in 2019.
The group’s £6.2bn ($8bn) positive inflows came mainly from institutional clients, specifically UK pension plans, and Asia. The group continues to grow assets in responsible investment strategies, with £174bn ($224bn) explicitly linked to ESG criteria.
Meanwhile, emerging markets specialist Ashmore’s assets were the ones with the biggest decline, falling by 15% to $83.6bn by the end of June 2020. The group was hit most in Q1 and reported net outflows of $5.8bn over the first half of 2020.
This was driven partially by retail clients reacting to the market slump in March and April and institutional investors pulling money in response to underperformance in specific strategies.
Although Ashmore’s overall asset base went down, its Ebidta margins improved from 66% in December 2019 to 67% at the end of June 2020, due to low distribution expenses and tight cost controls.
This is while Standard Life Aberdeen’s pre-tax margin fell to 27.6%, which compares to 35.7% at the end of 2019. ‘The change reflects a coronavirus-related client shift toward lower risk products that carry lower fees, as well as equity market volatility and withdrawals related to the settlement of arbitration with former customer Lloyds Banking Group,’ report said.
The firm’s fee based revenue declined by a more moderate 7% when the Lloyd’s withdrawals are excluded.
Negative outlook
Moody’s has changed its global asset management industry outlook to negative from stable in March 2020, reflecting the economic and market shocks triggered by the pandemic.
It said, despite good market performance in Q2 and Q3, which was largely due to aggressive action by the Federal Reserve and other central banks, the economic outlook remains weak with risks to the downside.
‘As AUM, revenue, cash flow and earnings are all highly correlated to the performance of financial markets, asset managers’ financial profile will remain at risk for the rest of 2020,’ the report stated.
Moody’s also highlighted key industry developments, saying that there is no regulatory let-up on fees, with the European Securities and Markets Authority (Esma) committed to ensuring fees charged to retail investors are fair, transparent and comparable.
The research referred to the study by ESMA on “closet indexing” released in September, which looked at 3,000 European equity funds and confirmed that investors in closet indexing funds face an unjustifiably high level of costs, far in excess of those for explicitly passive funds.
Eyes on integration
Noting other industry changes, Moody’s report also focused on a recommendation for closer EU capital market integration from the European Comission, which was made in June 2020.
‘The recommendations broadly aim to facilitate capital market and private equity financing, encourage cross-border investment, and improve the sophistication of retail investors through better financial education.
‘This would be credit positive for European asset managers, which have been unable to match the scale and profitability of their US peers, in part because of the EU’s fragmented capital markets,’ the report added.
The report also highlighted the role of Brexit uncertainty, with a no-deal scenario leading to EU “passporting” rights no longer applying to UK-based firms.
Last but not the least Moody’s noted boost that the pandemic provided for sustainable funds, attracting €26bn of net inflows in Q1 and adding €54.6bn during Q2.
