Falling equity markets have caused pain for many businesses. But despite the destruction of corporate wealth and the inability to access capital markets for growth, falling stock prices usually have only an indirect impact on business performance.
Not so for asset managers, however. Traditionally, asset management revenues have been directly tied to assets under management (AUM). So if AUM falls due to market performance, so does revenue.
As of yesterday, the S&P 500 was down over 40% YTD. This translates into a 40% decrease in top line revenue for asset managers. A 40% drop in revenue makes the auto sector look stable. Thankfully, the average closing value of the S&P 500 (a better indication of asset managers’ annual revenues) looks to be down about 17% this year. Still, 17% is going to hurt.
This, according to a report released this week by consulting firm Casey Quirk, a company specializing in the asset management industry. The report says that this top-line revenue hit can only be mitigated by reductions in headcount, incentive payouts or other operating expenses. As a result, asset managers will have to juggle these expenses in order to engineer acceptable profit margins next year. The chart below from the report makes the case…
According to the firm, incentive compensation for the typical manager will drop by 25% this year. Other operating expenses such as marketing, technology and travel will have to be cut next year just to keep operating profits from dipping below 20%.
On the sticky issue of headcount reduction, Casey Quirk says that if incentive compensation stays the same in 2009, a headcount reduction of at least 10% will be required by the typical manager just to keep profit margins at last year’s levels.
The report contains a matrix that combines various reductions in incentive compensation with various headcount cutting scenarios. Overall, things look pretty grim. For example, no headcount reduction would require a 20%+ drop in incentive compensation just to keep profit margins constant.
The firm concludes that:
“…further industry layoffs will be required as managers look to cut their total compensation and benefit expenses. In many firms, these cuts will be added to, and far exceed, the 10% staffing reductions that already commenced during Q4 2008.”
Avoiding this outcome would require a Herculean marketing effort that bumps AUM up by 15%+ or similarly dramatic reductions in G&A expenses (of around 20%), incentive compensation (of 20%+) or base salaries (of over 30%).
Casey Quirk says that privately-held asset managers “may have more flexibility to operate with lower operating margins in the near-term” while some publicly-traded managers are “slashing staff now.“
We’ve been keeping an eye on the “slashing” and have seen the following slashers in the past 2 weeks alone…
Blackrock Sheds Staff: “BlackRock has let go of 10 employees, including four investment managers, following news last week that it would make staff cuts as a result of its assets under management declining in the third quarter.”
MFS lays off 5% of workers: “MFS Investment Management of Boston today announced the firm is cutting 90 jobs, representing about 5% of its work force of about 1800. ‘The reduction is in response to the decline over the past 12 months in capital markets that has affected the firm’s assets under management…”‘
Assets fall puts money managers’ jobs at risk: “Money managers will see their assets fall globally by 15 per cent, or $10,000bn, this year, and the resultant drop in fees is currently causing the biggest round of job cuts for the usually stable and lucrative industry. American Century was this week the latest asset manager to announce job cuts, of 270 people, or 17 per cent of its work force.”
Putnam cuts 47 jobs, merges funds as assets shrink: “Putnam Investments fired 47 workers on Monday, including 12 portfolio managers, and said it was merging six stock funds following a dramatic decline in assets during the financial crisis.”
Miller’s Legg Mason unit to cut one-third of jobs: “Legg Mason Inc plans to cut a third of the jobs at a unit run by value stock picker Bill Miller, the No. 2 U.S. asset manager said on Thursday, as assets at the unit dropped more than 50 percent.”
U.S. fund industry braces for deep job cuts: “In the past year alone, asset managers including Fidelity have cut 2,723 jobs – 1.6 percent of the industry’s size in 2007.”
And hedge funds are getting in on the action too…
UBS Board Member Frey’s Horizon21 Losing Assets; Sheds Jobs: “ Horizon21, the hedge fund and private equity boutique of a newly-elected UBS AG (UBS) board member, is losing assets and will cut 10% of its workforce…assets slipped in the third quarter to $8.2 billion, down 13% from $9.4 billion in June…”
HBK Investments lays off 60 employees: “According to a source familiar with the hedge fund, the layoffs occurred across the board. Analysts, traders and operations personnel were among the employees that have been made redundant.
Highbridge to cut 10% of workers: “Highbridge Capital Management, one of the world’s biggest hedge fund groups, which is majority owned by JPMorgan Chase, is cutting 10 per cent of its workforce in the US.”
SAC Slashes Staff After Losses: “SAC plunged 11% last month, leaving it down 18% this year, and leading founder Steven Cohen to liquidate half of the firm’s equity holdings last month. Now, he’s slashing jobs, as well as portfolios.
GLG staff told to expect job cuts: “GLG Partners, a UK hedge fund manager with a New York listing, has told its employees to expect redundancies after its assets under management dropped by a third and most of its funds registered losses.”
And finally, if you made it this far into our list of recent slashing, you deserve to read this contrarian, but hopeful ditty:
Hiring Outpacing Firing for Fund Managers: “More asset managers are hiring than are firing staff, according to new research, despite the downturn in markets and investor confidence that has led many in the fund management industry to start cutting costs. FS Associates, a US management consulting firm focused on financial services, said a survey of 70 asset managers it conducted in the first week of November showed that, although about 20% of respondents have cut staff or expect to cut staff, 25% plan to add staff. The proportion of US asset management companies that are hiring is more than 25%.”
Addendum: For more commentary on some of the issues raised by this report, we suggest you also check out Tom Brakke’s blog here.