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4th Quarter Margins Flatline, but Closer Look Shows Most Asset Managers Continue to Recover

by Eric Daugherty

A few months back, I portended an earnings rebound for asset managers, and the 3rd quarter seemed to bear that out. Now that 4th quarter earnings are in for all the publicly traded asset managers, what do they tell us about the state of the industry?

S&P 500 Level

With a backdrop of largely rising markets (see level of the S&P above), the universe of publicly-traded asset managers collectively managed margins that were only equal to the third quarter. And, full-year 2009 margins still fall well short of 2008 margins.

However, a closer firm-by-firm look shows that most companies' margins bottomed out in the first quarter and continue to recover. This chart show operating margins for all fourteen publicly-traded firms.

Aside from a few aberrations, firms continue to improve their margins as the market environment improves. The few exceptions are Alliance Bernstein (taking a step back this quarter), BlackRock (which incorporates massive BGI figures for the first time), and Legg Mason, Waddell & Reed, and Invesco, who continue to trail the pack. Legg Mason and Alliance Bernstein were the only firms to see assets under management decline in the quarter.

Looking forward, I amend my prior forecast. Previously, I thought that rising markets and aggressive cost-cutting would lead to margin bonanzas. However, recent market events and financial figures lead me to believe that markets will hold steady and the industry will not continue its rationalization of costs and structure. Even if there is a "new normal" per Bill Gross, of lower growth and suppressed asset returns, the pain is too recent and rationalization is too hard to continue unless crisis demands it. A few aggressive opportunists will continue the hard work; everyone else will take a deep breath.

Firms need to continue to focus on rationalizing their structures. The threat of another downturn remains. In addition, regulation, industry maturation, and increasing consumer focus on fees portend eventual margin compression. Firms that prepare now will be set to thrive in an increasingly competitive future - in particular, smarter distribution, use of the web to drive marketing and efficiency, and leveraging emerging channels like social media will increase asset managers' ability to preserve healthy margins as long as possible.