Managers respond in various ways to margin squeeze

A combination of rising input costs, a more competitive marketplace, subdued returns in tough market conditions and investor drawdowns continue to place downward pressure on asset management fees.

A Bloomberg Intelligence report released in December 2022 highlighted looming factors that will heap additional pressure on fees.

According to the report, “a combination of inflation and the incremental cost of more ESGrelated fund offerings could likely trim investment-manager margins in the coming years, while ESG overlays may become more mainstream for all funds”.

Asset managers are responding to the impact that fee compression has on their businesses in various ways. While larger asset managers have the scale and volume to reduce management and performance fees, smaller players with tighter margins are looking to expand their offerings and deliver better value to clients.

“The greatest factor driving active asset management industry returns remains the ability to produce alpha over meaningful time periods. Managers who can show they consistently create long-term value for their clients will be able to charge clients for their service,” says Neville Chester, Senior Portfolio Manager at Coronation Fund Managers.

“And following a long period where global active managers have struggled to show alpha, we think that the normalisation of interest rates will create an environment where active asset managers will be able to show better returns.”

In addition, asset managers are considering cost-cutting measures to relieve some of the downward pressure on fees. In this regard, asset managers are investing in digitalisation to enhance back-end systems to streamline operations and reduce the admin burden.

Enhancing front-end engagement through automation or implementing AI-enabled chatbots and virtual assistants to handle queries or new client onboarding can also offload basic client engagements from managers, allowing them to focus on their core specialities and deliver better value for the fees they charge.

Other asset managers are opting to outsource their middle- and back-office business processes to third-party providers to unlock cost savings and free up internal resources to focus on revenue-generating and valueadding activities by offloading onerous administrative and repetitive tasks.