Traditional asset managers face ongoing challenges

It is going to take a more meaningful recovery in both equity and credit markets for traditional asset managers to get revenue and profitability back to normalised levels, according to major research and ratings house, Morningstar.

In an assessment of asset manager Janus Henderson Morningstar looked at the broader outlook and suggested that traditional asset managers may have adjusted their debt exposures coming out of the global financial crisis but the task in front of them remained formidable.

“Given the hefty amount of operating leverage inherent in the income statements of the asset managers, we have not been too surprised to see precipitous declines in the operating income of asset managers like Janus Henderson when managed assets and revenue decline meaningfully in response to equity and credit market dislocations like we’ve seen over the past year,” the Morningstar analysis said.

“The same phenomenon took place during the 2008-09 financial crisis, when the traditional asset managers were being hit with the double whammy of declining equity and credit markets and significant outflows from both equity and bond funds.

“The difference this time around has been that most of the traditional asset managers have spent the past decade leaning out their operations (as they looked to offset the impact of fee compression as a result of the growth of low-cost passive products), and few of them are carrying meaningful levels of debt on their books (which nearly led a couple of firms, including Janus, to trip their debt covenants during the financial crisis),” it said.

“That said, the traditional asset managers still carry a fair amount of fixed costs—especially in compensation, which tends to be their largest expense item—and at this point it is going to take a more meaningful recovery in both the equity and credit markets to get revenue and profitability back to more normalized levels.”

Dealing specifically with Janus Henderson, the Morningstar analysis said there had been little about the firm’s second-quarter results to alter Morningstar’s long-term view of the asset manager and that it was leaving its $39 per share fair value estimate in place and viewed the shares as being slightly or modestly overvalued.