Investment Management Confidence tracks strong market rises
Johannesburg, 7 July 2005:The investment management industry experienced boom times in the second quarter of 2005, with all investment managers gaining from strong inflows spurred by an equally buoyant equity market.
These are the findings of the quarterly Investment Management Index, a component of the Ernst & Young Financial Services Index, released today. The research and analysis of the study was done in conjunction with the Bureau of Economic Research (BER) at Stellenbosch University.
This is the third consecutive quarter that large investment managers have reported 100% confidence levels, with solid business inflows from both retail and institutional segments of the market.
Lesley Harvey, head of Ernst & Young’s Investment Management Industry Practice, says the strong gains in the equity markets, combined with new fund inflows, have lifted funds under management.
“Small managers recorded strong gains in inflows across all market segments. The private client market in particular, has turned around sharply, and demonstrates their desire to participate in market gains, with high net worth clients keen to participate in new generation products,” she says.
Harvey points out though that it appears that the smaller managers have had to price themselves more aggressively to benefit from the strong inflows into the industry. Given these inflows, she says small managers shrugged off the effects of lower average management fees, recording continued gains in net profits.
Investment Managers’ expenses continued to rise strongly during the quarter, with increased inflows requiring additional personnel. In addition, there were noticeable rises in IT-related spend, which we ascribe to a combination of catching up with previously shelved expenditure and growing capacity constraints. This resulted in rising expenditure on additional IT systems and upgrades to current systems.
Investment managers are optimistic about the third quarter, anticipating continued rises in inflows, across all market segments, namely unit trusts, institutional and private clients. In addition, Harvey explains that they anticipate stable average management fees, which, coupled with continued expense growth, should see profit growth falling but remaining nevertheless strong.
The results of the survey indicate that confidence remains strong in the industry. The Investment Management Index measured 98 points, with both small and large Investment Managers measuring strong confidence.
The JSE ALSI Index hit an all-time high in the 2nd quarter of 2005, which kept large Investment Managers’ confidence levels at a peak, (i.e.100% satisfaction with business conditions). Small managers’ confidence increased from 78 index points at the end of the first quarter to 94 points.
Investment managers reported the following activity during the second quarter of 2005:
- Institutional net inflows bounced back, private client net inflows picked up decisively and unit trust net inflows remained strong.
- Improved household finances, rising share prices and a shift in personal savings away from endowments (contractual saving plans offered by life insurers) and property, underpinned net retail inflows to the investment management industry in the second quarter.
- The total income of large firms continued growing rapidly, even more so than the first quarter’s growth. Growth in income of small firms weakened owing to reduced average management fees charged.
- Strong growth in expenses continued unabated. Whereas large firms have experienced high expenses growth since the 2nd quarter of 2004, total expenses of small firms only reached similar high rates in the 1st quarter of 2005.
- Small firms nevertheless increased net profits, despite lower average management fees and higher expenditure growth. The surge in large firms’ net profits follows their surge in income growth.
About The Survey
The Ernst & Young Financial Services Index is compiled quarterly, and provides a measure of confidence in the retail banking, merchant & investment banking, investment management and life insurance industries.
Ernst & Young together with The Bureau for Economic Research (BER) at Stellenbosch University conducts the survey and the analyses.
This quarter’s survey was conducted in June and the results processed in June. This is the 10th survey of investment managers, the 14th of banks and the 8th of life insurers conducted in South Africa.
Respondents are asked to provide their views on the estimated developments for the period 1 April 2005 to 30 June 2005 and their expectations for the period 1 July 2005 to 30 September 2005.
Ends
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Cathy Beckley
Ernst & Young
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Cathy Beckley