It’s one of the ironies of Thatcherism that, more than 40 years after the sudden deregulation of financial markets known as the Big Bang, the one sector of the UK economy that has not yet been subjected to Thatcherite-style cost-cutting is asset management.
It’s escaped it for several reasons — not least the fact that managing other people’s money is awesomely lucrative. But, as almost everyone now agrees, fund managers need to tighten the belts. Faced with tighter regulation, a greater emphasis on transparency and the rise of low-cost providers like Vanguard, Britain’s fund houses have no choice but to trim the fat. If they don’t, they can’t expect to enjoy anything like the average 36% profit margins identified in the FCA report on competition in asset management published last year.
The question is, then, where will those cost savings come from? Here are six suggestions.
The biggest expense by far that asset managers incur is staff remuneration. Salaries and bonuses are in some cases obscenely high, and it starts at the top. Salaries for CEOs of some firms have grown to more than 5m a year and some fund managers earn even more than that. And yet asset management is just another profession; why should those who work in it take home several multiples of what doctors, solicitors and accountants earn?
Fund managers trade far too often. It’s not unusual for them to turn over their entire portfolio in less than 18 months. Every time they trade, they incur expenses — brokerage costs, custody fees, stamp duty and so on — which all need to be paid for, either by the fund house or, more likely, by the client. The evidence shows that those very few managers who do outperform over the long term trade tend to trade infrequently. Simple solution: stop the endless buying and selling and invest for the long term instead.
For many years fund managers have quietly passed on the cost of equity research to consumers. Now, as a result of MiFID II, most are rightly feeling obliged to foot the bill themselves. The cost of research is huge — in 2012, for example, UK fund managers spent £1.5 billion on it. Yet much of the research provided, according to the ousted head of the Investment Association, Daniel Godfrey, is “valueless”. “Even some of the research providers,” says Godfrey, “will admit that 90% of it is never read by anybody.” Fund houses also spend about another £500 million a year on access to company executives; again, there’s huge scope for savings there.
The asset management industry is largely built on marketing, but as I said in a recent post, traditional fund marketing is on borrowed time. Fund houses spend a fortune on billboard and newspaper advertising, and on constantly churning out press releases. As consumers grow increasingly sceptical, as I’m sure they will, about the latest “must-have” funds, the old approach will undoubtedly become less effective. Firms could save money by focusing instead on developing their own content and online audiences.
Yes, sponsoring sporting and cultural events is great for visibility, but it’s also very expensive. Ask most investors whether they’d prefer their fund manager to sponsor, say, the British Lions or use the money to reduce their fees, I’m sure even rugby fans would opt for the latter. Last year Investec pulled out of a ten-year £40 million deal to sponsor Test cricket in England, and I expect other fund houses to rein in their sponsorship budgets too.
Finally, I’ve never understood why fund management companies feel they need to be based in the City or in Mayfair. Moving to a provincial city would save not only on renting or buying prime London real estate, but also on salaries. Birmingham, for instance, is fast becoming a satellite financial centre. If our second city is good enough for Deutsche Bank, HSBC, and possibly, if Labour comes to power, for the Bank of England too, it would surely be adequate for the likes of a Schroders or a Fidelity.
There are all sorts of other extravagances I could point to — donations to the Conservative Party and membership fees to the now (in my view) largely discredited Investment Association, for example. But that’s enough to go at for the time being.
Yes, this new era of austerity will be tough for an industry that hasn’t had to worry about costs until now. But it’s nothing that virtually every other sector hasn’t already gone through.