Distributor Margins Down Despite Bullish Fourth Quarter

By Jesse Mark & Gordon Chen
Despite lingering global economic uncertainty, markets rebounded in the fourth quarter of 2011. The Dow Jones Total U.S. Stock Index posted an increase of nearly 11.5% during the period, and total assets under management in U.S. open-ended mutual funds increased by 6% to $8.0 trillion. Net flows during this last quarter were slightly negative but had a negligible effect on assets.
But recent market gains have translated into mixed results for asset managers. Based on the earnings results from publicly-traded firms, kasina found that industry operating margins decreased from 32.2% in Q3 to 31.2% in Q4, while net margins rose from 20.1% to 23.1%. Both operating and net margins remain virtually unchanged from figures a year ago.
ASSET MANAGER PROFIT MARGINS
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The decline in operating margins can be attributed in part to a fundamental shift in investor asset allocation which continued in the fourth quarter. During this period, total flows reached over $122 billion as investors divested themselves of high-fee stocks and turned to lower-risk bonds. U.S. Stock funds saw outflows of $43.7 billion in the fourth quarter, while fixed income funds experienced inflows of $41.1 billion. Though the markets have shown recent improvements, investors remained unsettled by the lingering financial uncertainty. Correspondingly, investors are moving into lower cost index products. Actively managed funds lost $30.0 billion in outflows while passively managed index funds experienced inflows of $22.8 billion.
BREAKDOWN BY ASSET CLASS OF Q4 NET ASSET FLOWS
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Asset managers also face increased expense side pressure from distributors. Large broker-dealers are ramping up fees to access their platforms. Morgan Stanley Smith Barney raised base rates to $250,000 per year, per fund family, representing a five-to-tenfold spike in prices. Driving these increased demands are the relatively thin margins that wirehouses earn in comparison to asset managers. This past quarter the spread increased yet again, as distributor margins decreased while asset manager margins remained relatively steady. From 2009 to 2011, the spread between asset manager and distributor margins grew steadily and now stands at 19%. In the coming year, asset managers will likely face increased revenue sharing pressure due to the high spread.
ASSET MANAGER AND DISTRIBUTOR OPERATING MARGINS
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