Storm clouds gather over wealth gurus
Conditions are tough for experts in funds management writes Michael Evans.
Conditions are tough for experts in funds management writes Michael Evans. It's been described as "the perfect storm" hitting professional wealth managers: market turmoil, regulatory challenges and a flight from investments to the safety of cash.It's seen profits fall, a push for rapid change in response and has cost the head of the country's biggest funds manager, Perpetual Investments, his job. Wealth managers are being buffeted on several fronts as they try and deliver returns to investors and their shareholders.While the big banks record profits dominated the headlines this week, their funds management businesses and those of other listed funds managers, were telling a different story.The country's largest funds manager, Colonial First State, owned by the Commonwealth Bank, this week reported its underlying net profit fell by more than half in the six months to December 31 to $32 million.The Commonwealth reported an overall fall in funds under management in its wealth division of 7 per cent, citing "an uncertain global environment", "challenging market conditions "and a preference for cash and lower fee products. It was, management said, "the perfect storm".Funds under management in Australian equities fell 18 per cent on the half and 22 per cent on the year.One-time investment giant AMP posted a net profit of $668 million for the year to December 31, down 11 per cent on the previous corresponding period, mostly due to the drop in the valuation of the company's investment holdings.Earnings from life insurance and income protection rose 56 per cent to $215 million, while earnings from AMP's funds management arm fell slightly to $83 million, helped by AMP's merger with AXA. The result meant AMP was forced to cut its interim dividend by 1? and reduce its future dividend payout policy.The founder and managing director of Platinum Asset Management, Kerr Nielson, also reported a difficult half.Net profit fell 14 per cent to $67 million while revenue was down 15 per cent to $115 million.The business experienced funds outflow of $800 million with funds under management slipping from above $20 billion in 2007 to below $15 billion today.Nielson, too, was forced to cut his dividend to 8? from 10?.Mr Nielson warned in the update that market conditions will continue to be challenging, saying low growth will continue because of the west's "struggle with debt".He also questioned whether China's transition to greater domestic consumption "can be smooth" given the changes policy makers are undertaking. He concluded saying that the while market "valuations are great", the "macro outlook is poor".Mr Nielson attributed the "poor performance of the flagship fund, the Platinum International Fund, related to our particular investment style of looking for aberrations/neglect," saying there had been an "error of timing rather than having bought poor companies".It's not just volatile and falling market conditions proving difficult for professional investors.In its market update AMP highlighted significant headwinds the industry will face in coming years.The low-cost superannuation proposals from the government of MySuper "could impact margins over the longer term", AMP told investors. Similarly, the Future of Financial Advice proposals, removing commissions on advice, "could impact flows".The difficult conditions combined with the regulatory outlook have seen costs again become an issue for the wealth managers.Staff costs continue to be high in the industry and talk of a white collar recession continues to affect confidence of funds inflows and jobs at the major players.Deutsche Bank analysts say that at AMP "costs are key to maintaining margins".In the coming week, the country's largest investment manager Perpetual reports its results.In a tumultuous few weeks, it has sacked its chief executive Chris Ryan after he and the chairman "agreed to disagree" about future strategy and the pace of change.Ironically, the company was forced this week to update the market that underlying earnings and net profit were expected to rise more than expected, in part due to savings work undertaken by their dumped boss.Net profit is still expected to fall compared with last year.The company is also coming under the attention of corporate raider Gary Weiss who is said to be spearheading a challenge to the board backed by major shareholder Robert Millner of Soul Patts.With uncertainty lingering over the global economic environment, conditions remain challenging for funds and wealth managers to attract funds under management to invest and to achieve strong returns on investment markets.