The latest Ernst & Young investment management index shows that all investment managers who responded to the survey are satisfied with current business conditions.
On the back of this continued confidence, they have increased their spending levels considerably in the second quarter of 2006. Prior to this period, expenses had been growing rapidly, but hit an unprecedented strong rise in the latest quarter.
The research and analysis of the study, released quarterly by Ernst & Young, was done in conjunction with the Bureau of Economic Research (BER) at the University of Stellenbosch. Confidence is measured by satisfaction with prevailing business conditions, and the survey monitors both small and large investment managers.
The survey was conducted before the South African Reserve Bank hiked interest rates in early June, but after the onset of global market volatility experienced from the middle of May, noted Lesley Harvey, Ernst & Young Investment Management spokesperson.
During the second quarter, considerable volatility developed across global equity, commodity and currency markets, including South Africa’s. Investment managers have thus far, largely shrugged off the effects of the equity-market turmoil experienced in May, reporting higher inflows.
The investment management index shows that all players in the industry continue to be satisfied with current circumstances.
Harvey believes that it is too soon for investment managers to have felt any impact from the recent market volatility or interest-rate hikes. “All investment managers reflected satisfaction with business conditions, despite the market turmoil, which had already started,” Harvey noted.
Investment managers reported spending considerably more in the second quarter than they did in the first quarter of 2006, despite the market uncertainty. All areas of expenditure were considerably higher, with back-office, IT and systems costs reflecting the strongest rises.
“Investment managers have been reluctant to spend too drastically in the last few years, even though conditions have been good. They tended to be conservative in their approach to spending. However, that has subsequently changed in the last few quarters, and we are seeing continual strong rises in spending,” said Harvey.
Despite a sharp increase in costs, investment managers reported a noticeable rise in their net profits during the quarter, buoyed by growing net inflows. Across both the institutional and unit-trust markets, investment managers reported continued growth in their inflows.
“This shows that the hiccup on global markets that was experienced from mid-May onwards has not yet resulted in slower inflows for the industry. And, looking ahead, expectations are that the third quarter of 2006 will bring even stronger inflows, so there is nothing indicating just yet that they anticipate conditions are likely to change in the near future,” said Harvey.
“We see no signs that the investment managers anticipate greatly changed circumstances in the next few months, other, perhaps, than an easing of the growth in margins and profitability.
“It remains to be seen whether the global equity turmoil experienced in May will be a short-lived correction or the beginning of a major turnaround in investor confidence. If it turns out to be the latter, we can expect to see a change in outlook, and confidence, for the investment management industry,” Harvey concluded. — I-Net Bridge