Fewer Funds and Lower Margins: the Future of European Asset Management

(October 2, 2013) — Asset managers operating in Europe will have to ramp up a rationalisation programme of funds they began two years ago and concentrate on reducing expenses as margins creep down, according to Fitch Ratings.

Independent fund houses are in a better position than those attached to larger financial institutions, according the firm’s research arm, due to higher margins on fund sales and fees.

“Independents have, in general, higher assets under management (AUM) margins than asset managers that are subsidiaries of other entities,” Fitch’s report said. “Three-quarters of the independents in Fitch’s sample had a blended AUM margin in excess of 40bp, while only around one quarter of the subsidiaries had an AUM margin above that level in 2012.”

However, these independents are more likely to fall victim to changes in investor sentiment towards certain asset classes, Fitch noted.

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“A number of subsidiaries exhibit lower AUM margins (below 30bp) and higher cost/income ratios (above 70%), which together result in relatively lower profitability,” the report said. “In recent years, subsidiaries have not managed to increase AUM margins, reflecting stable product mixes and the relative inability to grow significantly AUM in higher margin specialties.”

One area that is hampering profitability in the sector is a proliferation of seemingly unnecessary funds and a downsizing of fund ranges that began after the financial crisis. This needs to speed up to gain better efficiency in the industry, Fitch said.

“In the first half of 2013, the European fund industry “eliminated” around 500 funds on a net basis, after 1,000 in 2012, mainly through fewer fund launches. But it only represents 1.5% of the total number of funds in Europe. Furthermore, the effort is still too marginal to help building critical mass. There are still 65% of cross-border fund ranges without a single flagship fund of more than €1 billion of assets.”

Although the outlook for European fund managers is not dismal, there will have to be changes in certain business models, Fitch advised.

“With changing market conditions and investor demand, business diversification and a clear marketing strategy capable of anticipating cycles will be increasingly important considerations.”

(October 2, 2013) – The Catholic Healthcare Investment Management Company (CHIMCO), a $26 billion health care fund, has reinvented itself as an asset manager.

On October 1, CHIMCO officially became Ascension Investment Management, according to its parent organization. While the moniker signals a new direction for the fund, it has retained its investment staff, external managers, Catholic values, and internal holdings.

“The new name reflects the company's completed transition from managing primarily Ascension assets to becoming a registered investment advisor and managing assets on behalf of outside clients,” the organization explained.

CIO David Erickson told aiCIO that this change allows the fund to capitalize on one of its most valuable assets: its skills as an institutional investor.

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“Hospital revenues are dropping, and they’re looking for ways to diversify their income,” Erickson said. “We already had existing clients, and a number of organizations who wanted to join their assets in with us.”

Ascension aims to become the leading manager for asset owners that share its values for socially responsible investing, according to Erickson.

"Everything we invest in is done with our values in mind, and the clients we partner with have similar values to ours," he told aiCIO in late 2012. “We don't think those guidelines impair our returns, but they do require extra work—more due diligence and monitoring.”

CHIMCO’s leaders saw an opportunity with smaller, values-oriented assets owners who lack the capacity to take on that extra work—or at least do it efficiently. With the new branding, Ascension hopes it raise its profile in that space, according to Erickson.

“Obviously, our size helps us to access excellent managers and negotiate from a position of strength," he said.

Furthermore, Erickson noted that the team’s expertise in alternatives has been a particular draw. “For example,” he said, “we already have a non-Catholic client that’s invested just in our hedge funds portfolio.”

The St. Louis, Missouri-based fund won in the healthcare category at aiCIO’s 2012 innovation awards.

Related Content: Profile of David Erickson