The Markets September 16, 2010

ETF Assets Down 2.7% in August

Assets in the exchange-traded funds (ETF) space fell $21.8 billion to $800 billion in August, down 2.7%, according to the latest data from State Street Global Advisors (SSgA).
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Declines in size categories accounted for the majority of the total equity AUM drop, SSgA said. Large Cap assets fell $15.4 billion, followed by Small Cap, down $3.6 billion. All size and style categories declined in assets.

Meanwhile, the Fixed Income and Commodity categories rose $3.9 billion and $3.4 billion, respectively.  Year-to-date, areas with significant positive asset growth are commodities: up $11 billion, fixed income: up $31.1 billion, and dividend/fundamental: up $4.4 billion. Eight of ten sectors fell for the month with financials losing the most, down $1.2 billion. Utilities and materials were up slightly in absolute terms.

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The top three managers in the U.S. ETF marketplace were: BlackRock, State Street, and Vanguard, collectively snapping up approximately 84.3% of the U.S.-listed ETF market.

The top three ETFs in terms of dollar volume traded for the month were the SPDR S&P 500 [SPY], iShares Russell 2000 [IWM] and PowerShares QQQ [QQQQ]. The top three ETFs in terms of assets for the month were the SPDR S&P 500 [SPY], SPDR Gold Shares [GLD], and iShares MSCI Emerging Markets [EEM].

 

The Markets September 16, 2010

Margin Compression a Sign of Maturity

An analysis from kasina finds that while asset management firms' operating and net margins vary wildly, overall industry margins have come down.
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Using the earnings results of publicly-traded asset managers, kasina examined industry operating margins (operating income/revenues) and net margins (net income/revenue) since 2000.  It found that industry operating margins have decreased from 39% to 29% and net margins have declined from about 27% to 20% over the same period.   

“This compression is exactly what we would expect to see in a maturing industry,” said Eric Daugherty, Director of Research and Principal, according to a press release.  

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The consulting firm says several overarching factors will contribute to the continuation of this squeeze: slower U.S. economic growth over the intermediate term; aging demographics that will slow asset accumulation and inch toward decumulation; increasing and centralization of distributor power; and  consumer demand for lower fees.   

To prop up margins, kasina recommends:  

  • Focusing on higher revenue products, geographies, or segments; 
  • Differentiated products with believable alpha stories that sustain higher fees; 
  • Go international, into less mature markets with less price competition; 
  • Focus on market segments where the firm has a competitive advantage (e.g. retirement, where no one is an acknowledged leader); 
  • Cutting costs at a given level of revenue, like using the Web to drive efficiencies. 

 

Or, kasina says, asset management firms can live with decreasing margins, and make money on volume: 

  • Compete on price on commodity-like beta products, 
  • Get scale via acquisitions and organic growth of core funds. 

 

According to the press release, kasina asserts that in the long-term, there will be a shakeout as stronger firms survive and thrive while others wither. This may not happen for ten years, as making 30% operating and 20% net margins is still fairly attractive.   

Short-term, kasina expects firms to fight to maintain margins by ramping up marketing, striving for organic growth via differentiation, and considering strategic mergers. In the long-term, firms should be taking steps to rationalize product lineups, drive efficiencies, optimize distribution, and gain scale in order to protect themselves from the margin squeeze that has already begun, kasina said.  

 

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