(Clarifies title in last paragraph to Asia Pacific head of investment consulting)
HONG KONG, Dec 3 (Reuters) - Asia’s fund management industry will see further job cuts in the coming year as a plunge in revenue caused by the global financial crisis forces it to rein in costs, senior executives said on Wednesday.
The industry in Asia, like its U.S. and European counterparts, is being slammed by the triple blow of a plunge in net new sales, a drop in existing assets caused by falling markets and a shift by investors into more conservative products that tend of have lower fees, they said.
“Margins for fund managers are going to come down quite dramatically this year,” Vincent Duhamel, chief executive of fund of hedge funds manager SAIL Advisors Ltd, told an industry conference in Hong Kong.
"You're going to see a number of players that are either going to fall by the wayside or are going to have to decrease their cost structure a lot," added the former Goldman Sachs GS.N executive.
Revenues for the fund industry are traditionally based on fees charged as a percentage of assets. McKinsey said in a report early this year that the industry’s recent operating profit as a percentage of assets was 12 basis points in the UK and 18 basis points in the United States.
But like their U.S. and European peers, stock markets in Asia have been hammered by the financial crisis, with the MSCI index of Asia-Pacific equities exJapan .MIAPJ0000PUS down 59 percent this year after rising by a third in 2007.
SALES DROP, ASSET SHIFT
Adding to the woes has been the drop in sales. Hong Kong’s fund industry group reported in September that even before the market drops seen that month and in October, net sales of mutual funds after redemptions fell 98 percent from a year earlier.
And revenues have also been hurt by a shift away from equity funds, which typically charge fees of about 1 percent, compared with bond and cash funds that can sometimes charge fees as low as 5 to 25 basis points for major investors.
The volume of job cuts still to come will depend on the types of funds run by each house, with stock-focused firms the most vulnerable, said Khiem Do, chair of the Asia multi-asset group with Baring Asset Management in Hong Kong.
“If the house has bonds as well as equities, then it balances out a little bit. They don’t need to cut drastically. But if the house is a full equities house, what choice do you have? Your revenue is down 50 percent. You have to address your cost base,” he said on the sidelines of the Asian Investor event.
He said Baring had not yet cut jobs but the situation going forward would depend on how markets performed in the next six months.
CUTTING IN MUSCLE
Asian executives said part of the reason for cuts was that the region’s strong multi-year bull market had encouraged firms to build up their operations.
“The longer good markets persist the more you build up your fixed costs, sometimes unintentionally. But those fixed costs have got to be moderated if you’re going to survive a big down market,” said Chris Ryan, Fidelity International’s managing director for Asia ex-Japan.
“Obviously staffing is the biggest fixed cost,” he said.
Ryan told Reuters in November that Fidelity’s Asian operation had not engaged in the kinds of layoffs seen at U.S. affiliate Fidelity Investments, the world’s largest mutual fund firm, but that people who left the firm had generally not been replaced.
Industry watchers warned that the long-term risk is that in a bid to remain profitable, firms hurt the performance of their funds and operations by cutting too deeply.
“I think most will be smart, but I think it’s inevitable that some will cut out a bit of muscle as well,” said Naomi Denning, the Asia Pacific head of investment consulting for Watson Wyatt. (Reporting by Jeffrey Hodgson; Editing by Anne Marie Roantree)
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