EY released its second quarter asset management index today. Which shows that confidence in the asset management industry fell once more. The index has moved down from 77 to 67, a downward move that contradicts the strong growth in the JSE's record-breaking equity indices. Chris Sickle, Asset Management Lead Director at EY joined the Power Lunch, to help break down the essence of what the move means. It is worth noting that it is the big asset managers who are marking the decline in positivity as they experience slower inflows. Chris provides an in-depth look at the circumstances driving the index, exactly what it is tracking in the South African economy and what can be expected of the environment as a troubled South African economy forges ahead. – LF.ALEC HOGG: Welcome back to Power Lunch. Chris, around the world, asset management fees have been under a lot of pressure. They've been squeezed in the same way that IFA fees and many other fees in the financial services sector have come into the spotlights, since 2008. Do you think that with asset managers in this country bracing themselves for an attack on their fee structure, that this is perhaps partly behind the drop in confidence?.CHRIS SICKLE: Thanks Alec. No, I don't think it's driven as much by the fees. We do a survey based on their fundamentals around inflows. The index has dropped from 77 to 67 index points and I think this is the first quarter in a while where, when you compare it to the JSE index, has gone the other way. The other big driver is the sluggish inflows coming to asset managers, which is one of the fundamentals we measure as well as overall, what their confidence or appetite for trading conditions are currently. If you look at what the index is telling us, it's that six out of ten managers are not comfortable with the trading conditions as it is..ALEC HOGG: So the index that you're talking about is not talking to their profitability or future profitability. It's talking specifically to…what?.CHRIS SICKLE: Basically, the profitability as well in terms of…from a growth perspective that has slowed. There is obvious pressure, given that they're not receiving a lot of funds in the past two quarters. When you take the average fees per client and you multiply it by the asset under management that obviously has an impact on profit. In answer to your original question around whether they're being squeezed, I think it's fair to say that the market is looking at the fees being charged for asset managers. I think what happens offshore tends to come back into South Africa as well, and we probably will see pressure..ALEC HOGG: Just take us through what has happened offshore..CHRIS SICKLE: Depending on what type asset manager, there's been a lot of fee pressure there. In addition, the regulators have looked at fees to understand whether the advice they're giving is fee-compatible, etcetera..ALEC HOGG: Similarly, in South Africa the regulators here are having a look at it. I guess what you have to do is see the listed asset manager, Coronation Fund Managers, which was R20.00 per share three years ago. It's now R100.00 per share, so the share price has gone up fivefold in the last three years. At some point in time, you have to believe that that cannot continue or at least, will start retracting..CHRIS SICKLE: That's correct. I think that's the big question. Nobody will ever know Alec, but the company over the past… I can't comment fundamentally on the company. I haven't done a fundamental analysis. Our view is that the company has done well and gathered lots of assets over the past few years. Obviously, when you look at the share price, it has done well..ALEC HOGG: But if you're generating operating income of R1.2bn and there are about 200 people who work there, you have to ask yourself if those fees are sustainable into the longer term. Clearly, what's happening internationally is not the case. Getting back to your index itself, how does it compare with past years?.CHRIS SICKLE: The index has probably been at its lowest in the past two years. I think it's 66. Obviously, the top end of the 100 – so it has come down quite a bit. The other thing is if you're really looking at the valuation of companies now, the JSE is at an all-time high. The local economy: you have an ever-widening gap between inflation and GDP and I think investors are really looking at the market and saying 'do we take the profit? Do we hold onto cash?' For the past three years, everybody has been speaking about a correction. Is a correction imminent? Nobody knows. It could track for the next couple of years on the way it's doing now..ALEC HOGG: So the loss or the decline in confidence amongst asset managers is on the view that perhaps our stock market is a little overpriced..CHRIS SICKLE: That's correct..ALEC HOGG: And if it isn't…if it continues to follow as someone like David Shapiro would argue – continues to follow the international market, which seem to only now be getting steam, would you imagine that your confidence index would change?.CHRIS SICKLE: I think it would be a split, Alec. Obviously, we can invest 25 percent offshore. For the local economy and for the local investors, that's doing well. If you look at the Rand hedge counters, they've probably held up the JSE index for quite a bit, but I think that the local domestic companies will feel pressure going forward..ALEC HOGG: There's no doubt, but the calculations and the research David Shapiro has done…he tells us on this program that over 60 percent of the profits generated by the top 40, come from outside the country. As a consequence, his view is 'well, keep going gangbusters, market'..CHRIS SICKLE: Yes, and for fund managers again, you have a 25/75 percent split. You also want to make alpha. You want to outperform the local market as well and I think that's where it lies as well, to some extent, which is 'to what extent can we outperform'. The index therefore carries on the way it's doing. It's very difficult to outperform the market from a performance fee perspective..ALEC HOGG: Chris, I have no doubt that there are some IFA's watching this and they would be thinking 'if the asset management grouping are feeling less confident or at the lowest level of confidence in some time, should I be worrying about my business as well'..CHRIS SICKLE: I think this is probably a good time for the IFA's to consult with their clients. IFA's will have to sit with their managers, on products they are selling as well as advising the client what's best, going forward. Again, similar to what David said, three years ago you were sittings saying 'there were corrections', but he's saying the other view is that it's likely to continue. But again, it's that crystal ball effect. No one knows..ALEC HOGG: It is so difficult, I think that the financial markets are as difficult to read today, as they were in 2007. How far does the index track back?.CHRIS SICKLE: The index does track back to 2007 as well, and I think the low point in 07/08 was slightly under 50 – probably about 45. That was the lowest..ALEC HOGG: So we're still in a better spot than we were right there. That was Chris Sickle, Asset Management Lead Director at EY – interesting insights. I still think you have to be careful if you own Coronation Fund Managers' shares. The pressures are starting to build on the business model. There's nothing wrong with company and nothing wrong with the way they pick stocks, but you cannot continue upwards indefinitely, and this is a share that's gone from R20.00 to R200.00. Do your homework.
