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The cost cutting has by no means ended. To live to tell the tale of the current abysmal demand for mutual funds, a thorough overhaul of cost structures needs to take place.
ôAs we see funds moving out of emerging markets, we will see margins for fund managers coming down quite dramatically in addition to asset levels going down,ö Vincent Duhamel, CEO of Sail Advisors, said during AsianInvestorÆs æFund Management in FluxÆ conference earlier this month.
Mutual fund assets under management in Asia ex-Japan fell by 12% to $991 billion in the first half of 2008 from $1.126 trillion at end-2007, according to Boston-based financial services consulting firm Cerulli Associates. By the end of this year, AUM could be down 20% to $915 billion.
ôIf you are unable to bring down your cost structure fast enough, you will have a very tough year in 2009,ö Duhamel says.
Bringing down fixed costs will be the key to survival, says Chris Ryan, managing director for Asia at Fidelity International.
Indeed, Fidelity is among the fund houses that have already started working on their cost structures. In recent months, the fund house has let go of some of its staff, although relatively minor compared to the purging that took place in its Boston-based parent, Fidelity Investment, which announced a two-stage layoff of nearly 7% of its 44,400 employees in the US.
ôLike all companies in todayÆs environment, we are continuing to manage our costs, including staff costs, so they are aligned with current market conditions,ö Fidelity InternationalÆs spokeswoman told AsianInvestor at the time of the layoffs in Asia. ôThis is an ongoing process to ensure that the business is well positioned to continue to deliver superior products.ö
Staffing is the biggest fixed cost fund houses have to face, and thus layoffs are the more effective means of cutting costs during crunch times like these. Other fund houses that have reduced staff in Asia include JF Asset Management, BlackRock, ING Investment Management, Janus Capital and AllianceBernstein.
Ryan notes that the layoffs in fund houses in Asia this time around have been particularly swift.
ôThis cycle is probably the fastest we have seen the industry react,ö he says. ôCompare that to 1997 to 1998, it took 12 months to react to fixed cost issues following the Asian financial crisis.ö
David Russell, head of client sales management for financial institutions and head of investors for global transactions services at Citi, says the brand profile of fund houses will be a crucial component of success during these turbulent times.
ôThe big, independent fund houses will be the more prevalent lot going forward. ItÆs the same in the alternative space as well, where the big hedge funds that have done well in the last two to three years are still attracting interest and investments. Anyone that fell off that bracket is really struggling,ö Russell says. ôThere has been a polarisation. ItÆs going to come back to the big boys ending up the winners.ö
In a recent report, Cerulli notes that the need for cost saving will also affect brand building. Alternative and cheaper forms of marketing û online, outdoor, and search marketing, for example û could grow at the expense of more traditional media, the firm says.
ôThese channels could allow fund managers to more closely target messages to specific investor groups, in line with the trend towards greater client segmentation, and to deliver a different message of asset stability and retirement planning, rather than niche themes and speculative investing,ö Cerulli says.
In Hong Kong, fund houses need to assess their cost structures even as they face additional expenses in light of a Securities & Futures Commission (SFC) requirement for all issuers of retail investment products to review whether their risk disclosure and product descriptions are adequate.
What the fund houses are working on now is the creation of a uniform warning label to be placed prominently in information documents of new funds being launched or portfolios that are being re-launched.
An executive at an international fund house in Hong Kong expects the stricter compliance with disclosure requirements to end up being a major expense because it would affect all information materials, whether they be materials used for printed information or electronic, radio, and television campaigns.
While cost cutting is inevitable, it wonÆt drag on needlessly. Industry players expect fund houses to be able to quickly rebuild their operations in Asia once risk appetite returns.
With the ongoing rationalisation of cost structures, FidelityÆs Ryan believes the fund management industry will be in a better footing to compete for new business in six monthsÆ time.
A related article on cost cutting, titled æCost Cutting: every dollar countsÆ can be found in the AsianInvestor.net archives.
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