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Newsflash: Industry Margins Are Driven By...

By Eric Daugherty

...market performance! Some findings are surprisingly unsurprising. The 1st quarter saw a huge dip in the markets, then a huge rebound. On balance, the stock market rose a few percent. So did asset manager margins.

We realize that margins are correlated with the markets. How strong the correlation is was reinforced by the graph below, which maps asset manager margins and overlays the average level of the Wilshire 5000 Index by quarter.

However, just because industry margins rise and fall with the markets does not mean that all firms succeed and fail equally. As you can see below, there continues to be a big cluster of firms earning between 25% and 32% operating margins, but a few firms do better, and a few worse.

So, if firms' operating margins are driven by a largely uncontrollable markets, how do they maximize value? By continuing to rationalize their structures even (and especially) when times are good. All firms cut costs during the downturn, but how many of those cuts will stick? In our Costs of Compensation study last year, we found that firms were split in how they were reacting to the financial crisis - some were in denial, some reactionary, and some making thoughtful, opportunistic change.

Firms who want to boost margins above the industry average need to recognize that, even though immediate crisis in the markets has passed, the opportunity and need to continue intelligent rationalization of cost structures remains. Those firms wanting to earn superior margins should be maintaining fiscal discipline, not just hoping for favorable markets to prop them up.