Investment sector heads downhill in worst year since 2008

In his first e-mail to staff after being made chief executive of DWS last month, Asoka Wöhrmann was blunt.

“We are doing business in an extremely challenging environment,” he wrote hours after taking over the €692 billion German fund manager. “Following a long period of sustained growth, our entire industry is once again experiencing what troubled waters feel like.”

DWS, which was spun off from Deutsche Bank this year, has had a tough start as a public company. Its share price is down more than a quarter since its initial public offering in March, while its forward price/earnings ratio, a measure of its value, has dropped below 10.

Investors glued to the markets have needed a strong constitution — not least those working for listed asset managers.

Public North American managers have fared slightly better than their European counterparts. The Datastream index of US managers is down 18 percent since January compared with a 22 percent fall for the European benchmark. But investment industry executives on both sides of the Atlantic face similar pressures.

“Some of these stocks have got so beaten up that expectations are pretty low,” says Robert Lee, an analyst covering asset managers at Keefe, Bruyette & Woods, the investment bank.

Listed fund company stocks are often said to possess high beta, meaning they are more volatile than the rest of the market. This is due to the fact fund managers’ investment performance is typically closely tied to the markets, which affects the amount of assets they can attract and fees they can draw in.

Many fund companies achieved record inflows and strong revenues last year on the back of buoyant markets. Their own share prices soared.

As market sentiment turned, however — the result of rising interest rates, unwinding monetary policy and global trade disputes — fund managers saw investors pull money, resulting in lower fee income.

Analysts point out that asset managers are valued cheaply, at their lowest price/earnings ratios outside a crisis period. This, they say, highlights the lack of confidence for growth across the sector.

The average forward P/E ratio for traditional European managers has dropped from 14.3 to 10.9 over the past three years, while equivalent US managers have fallen from 14.4 to 10.5.

“The recent sector de-rating has affected managers of traditional core strategies the most, implying meaningful downside risk to their earnings,” says Vincent Bounie, senior managing director at Fenchurch Advisory Partners, an investment bank. “Only firms with differentiated strategies have been able to protect their ratings, in particular in private markets, solutions and high conviction active.”

While many listed asset managers have suffered share price falls of 20-30 percent, a few have been hit much worse. For example, GAM, the Swiss fund manager, has seen its market value plunge more than two-thirds on the back of a series of damaging revelations.

The company, which started 2018 on a firm footing, announced a hefty write-off in July and shocked the market weeks later by suspending a high-profile manager. Clients deserted GAM and its share price plummeted.

“The share price is a function of how the business does,” Alex Friedman, GAM’s chief executive, tells FTfm. “The share price in the industry overall has taken a hit and we’re not immune from that.”

He says he is hopeful the company can move on from its calamitous few months. “Obviously, we’ve had this Q3 setback but ultimately if our investment performance holds up, the share piece should follow,” he says.

Two other household-name European asset managers have seen the market turn against them. Jupiter, the £48bn UK group, has suffered a fall in market value of about 45 percent since January as its flagship bond fund has bled assets.

Jupiter has suffered close to £3.5 billion of outflows this year, while its Dynamic Bond fund, once one of Europe’s fastest growing products, has shrunk from £9.7 billion a year ago to £6 billion on the back of mixed performance and redemptions.

Standard Life Aberdeen is another UK manager that has been hit by a tumbling stock price. It too has suffered heavy outflows from its principal products — the Global Absolute Return Strategies fund from its Standard Life legacy business, and emerging market funds from the Aberdeen Asset Management side.

The £610 billion Scottish manager was also walloped by Lloyds Banking Group in February when the UK lender said it intended to take away a £109 billion mandate to manage money for its customers, one of the biggest such arrangements in Europe. When SLA later announced its decision to sell its insurance book to Phoenix and offered to return £1.75 billion to investors, the market shrugged.

Public US managers have not been immune from sliding share prices. Invesco, the Atlanta-based company, is the worst-affected large manager, with its shares falling more than 40 percent since the start of the year. Unlike other big tumblers, Invesco has seen its shares flow downwards rather than jolt.

As with many of its peers, Invesco has struggled with outflows, though its recently confirmed $5.7 billion deal to buy OppenheimerFunds from MassMutual will propel it into the trillion-dollar club with $1.2 trillion of assets under management.

Shares in WisdomTree, the specialist smart beta exchange traded fund provider, are down more than 40 percent since January. In 2016 it was one of the top-four smart beta ETF players, accounting for 11 percent of the global market. It bled $5.1 billion in the first eight months of 2018, according to ETFGI, the data compiler. It controls 6 percent of the market now.

In almost all cases, asset managers with the biggest share price falls this year performed strongly in 2017, reflecting a heavy market correction. Not all companies have seesawed. AllianceBernstein, the $550 billion US fund manager, is one of the few listed groups to have had improved share performance, up close to 20 percent. It is majority-owned by Axa Equitable, the US business spun off from French insurer Axa in May.

“AllianceBernstein have been able to buck the industry trend and have had mostly positive flows into high-fee products,” says Mr. Lee. “They have also done a good job of continuing to attack their expense structure.”

He adds: “The key is not flows, it’s about investor confidence in managers’ ability to grow those flows.”