Competitive Challenges in the News Managers Prep for Rebound Amid Job Cuts Article published on January 23, 2009 on FundFire By Chris Larson Asset managers are making "radical cost cuts" in response to sharp drops in their assets under management, a new survey finds. But the survey, from Greenwich Associates, also finds that costs aren't dropping as quickly as assets, and that managers are trying to stay in position for an expected market rebound later in 2009. The consulting firm surveyed C-level officials at about 50 firms in December and found that, on average, portfolio assets dropped by 31% in 2008, through the end of November, due largely to slumping markets. There was a wide range, however, with the worst performer in the survey losing 67% of its assets and the best losing just 2%. Those drops have naturally led to "dramatically lower planning assumptions for 2009 revenues," Greenwich says: the average firm expects 33% less revenue this year. "Some of the worst-hit firms expect 2009 revenues to decline more than 43% from 2007 levels," the report adds. And that means cost-cutting, particularly layoffs - but not by as much as their assets and revenues are dropping. "You see revenues declining by almost 33%," says Greenwich consultant Goran Hagegard. "They're cutting costs to the tune of about 20%." The difference is because of some long-term thinking, he says. "Managers are really investing in lower profit margins. They're accepting lower margins to position themselves for a rebound in the markets," Hagegard says. The idea is that when the markets rebound, perhaps later this year, assets under management and revenue will rise. And managers want to have adequate staffing to take advantage. This mindset is aided by the fact that asset management has long been a highly profitable industry. Hagegard notes that profit margins at the average manager are expected to drop from around 33% to 21% this year - a sharp decline, but, "We're still talking about a fairly healthy business model. They're still making money." Hagegard says many managers have clearly learned from the last bear market at the start of the decade. "A lot of firms then cut their investment and client-facing staff too quickly, and weren't able to rebound as quickly" when the markets came back, he says. The Greenwich survey confirms, in a broad sense, what many firms have been saying individually: that client-facing professionals like relationship managers and sales professionals have largely been spared the ax, so far. "Most managers are trying to protect client-facing personnel and investment staff," Hagegard says. But some investment-office cuts are inevitable, as some firms have been closing or merging underperforming products as part of a wider review of their operations. The Greenwich report comes in a week when many publicly traded asset management firms have been reporting their fourth-quarter numbers. Earlier this week State Street Global Advisors, BlackRock, Northern Trust Global Investments and BNY Mellon all reported year-over-year drops in assets under management, ranging from about 27% for SSgA and NTGA to just 2% for BlackRock, as reported yesterday in FundFire. On Thursday, AllianceBernstein and Janus Capital Group reported their own losses: AllianceBernstein's fell from $800 billion at Dec. 31, 2007, to $462 billion at the end of 2008 - a 42% drop that was largely due to market depreciation, the company says. Janus saw its assets drop 40%, from $207 billion to $124 billion, over the same period, the company said. Also Thursday, Franklin Resources - whose assets fell 18% to $416 billion in the fourth quarter - said it will be cutting 4% of its workforce, about 350 jobs, in addition to a 2% cut announced last fall. Franklin says it will provide more details when it releases its fourth-quarter earnings next week. Hagegard notes also that every manager is cutting costs, whether by culling low performers, revising travel policies, or making sweeping job cuts. Over half of the companies that took part in Greenwich's December survey said they had made or announced layoffs; the average cut was around 11% of total workforce. Other cost-cutting measures mentioned by participating firms included salary and hiring freezes, reduced base salaries, reduced employee benefits, and reduced bonuses. The average firm's bonus pool for 2008 will be about 29% lower than it was in 2007, Greenwich reports. Hagegard warns that, while cost cuts are lagging behind revenue drops for now, that can't last forever. "If we don't see a rebound, I think we'll see another wave of cost cutting," he says - which will include more rounds of layoffs, potentially impacting client-facing personnel as well. He expects that to happen if the markets don't stabilize and begin to rise by around mid-year. And in the meantime, cuts in areas like IT and support services can't help but have an impact on relationship managers, who don't have the same levels of support they once had. That presents its own problems to those who still have a job. "It's a huge challenge for companies to manage their expenses down to a sustainable level, while keeping their clients happy," Hagegard notes, "especially at a time like now when clients are requiring more transparency and more hand-holding." Hagegard adds that Greenwich's ongoing conversations with plan sponsors reveals, not surprisingly, "a bit of deer-caught-in-the-headlights behavior," with many institutional investors not making major changes to their portfolios, for now. That will change eventually. "There will be some clear changes, such as those related to risk controls and how you measure risk," he says. He thinks pension fund search activity will pick up again once the markets settle down, and notes that the ongoing market volatility may actually be good news for poorly performing managers: "They may have gotten a reprieve from this," Hagegard says, because a pension may be holding off on firing simply because there are few to no good places to put the money.