A recent study of 44 investment management firms indicates money managers are discounting management fees for some styles of investment - and, therefore, may be experiencing pressure on profit margins.
In the study, which concerns 1992 and 1993 and was conducted by Investment Counseling Inc., West Conshohocken, Pa., general equity accounts showed a ratio of firm revenue to average assets under management of just 46 basis points. Stated fee schedules for general equity accounts in the study ranged from 48 basis points for accounts of $100 million and greater, to 84 basis points for $5 million to $10 million accounts.
In addition, balanced account fees for managers in the study also appear to be lower than stated fee schedules. Average fee revenue for balanced accounts was 46 basis points, while the stated fees for managers in the $10 million to $50 million size - where a majority of balanced accounts could be found - were between 56 basis points and 69 basis points.
Charles Burkhart, president of Investment Counseling, said sliding management fees could be a problem because many investment managers are gearing up for expansion by adding staff and equipment, which also eat away at margins. Boutique firms, in particular, could get squeezed by falling fees and increased capital expenditures, if they try to expand amid falling margins, he said.
Meanwhile, fees for other styles of investment appeared to be closer to stated fee schedules. Average fees relative to average assets under management were 75 basis points for small-capitalization equity accounts; 65 basis points for mid-cap equity accounts; and 34 basis points for fixed-income accounts.
Other study results show new accounts and added allocations for money managers to be greatest, as a percentage of assets, for firms managing $1 billion to $10 billion. That supports a pattern of institutional investors gravitating toward fewer managers, and larger multiproduct firms, the study concludes.
For firms managing $1 billion to $5 billion, 27% of assets under management were represented by new accounts or additional allocations, the study says. Firms managing $5 billion to $10 billion had 22% of their assets represented by new accounts or additional allocations.
For firms in other categories, the numbers are good but measurably less, Mr. Burkhart said. For managers of less than $500 million, account growth as a percentage of assets was 9%; for managers of $500 million to $1 billion it was 11%; and for managers with more than $10 billion, it was 18%.
Overall, the value of new accounts and additional allocations was valued at 20% of the firms' assets under management.
Terminations and withdrawals followed a similar pattern, carrying a greater value, as a percentage of assets, for the categories of firms that had the least amount of account growth. For firms with less than $500 million under management, terminations and withdrawals of assets were valued at 11% of assets under management, 17% for firms with $500 million to $1 billion under management, and 12% for firms with more than $10 billion under management.
For firms managing $1 billion to $10 billion, terminations and withdrawals represented just 6% of assets under management. For all firms in the study, terminations and withdrawals amounted to 10% of assets under management.
The results suggest a trend toward a polarization of the money management industry, Mr. Burkhart said. "There's too much competition," he said, which will lead to an industry made up of smaller boutiques and larger multiproduct firms .