Money managers' profit margins are rising, particularly among independent firms, according to an upcoming survey of the investment management industry.
Median profit margins for investment management firms rose to 31% in 1995 from 25% in 1994, according to preliminary results of the annual Business, Financial and Compensation Analysis by Investment Counseling Inc., West Conshohocken, Pa. Increased fee revenue and lower operating expense levels helped increase profitability, according to the study.
The median firm increased revenue by 11.6% in 1995, far ahead of the median increase of 4.7% in 1994, while operating expenses grew 7.5% in 1995, compared with 15.8% in 1994.
The bull market played a significant part in improving margins, said Gregory Hazlett, director of research at Investment Counseling. The strong financial markets in 1995 helped increase revenue, as well as helped increase asset bases through strong market appreciation.
At the same time, slower operating cost growth in 1995 might have been a factor of previous expenditures made to upgrade technology and invest in the business, said Mr. Hazlett. Managers might have been reaping the advantages of their 1994 improvements during the 1995 market run-up.
"The timing may have been an issue in terms of expenses (made) and a tough (market) environment in '94 vs. lower expenses and more revenue in a much better environment in 1995," he said.
The median firm increased its assets 21% last year, with a median compound-annualized rate of growth of 14% for the past three years.
Independent money managers were the fastest growers, with a 22.7% compound annual rate of growth for the three years, followed by affiliates of brokers and investment banks, which grew at 14.2% annually, and insurers, who grew at 11.3% for the period.
Affiliates of banks and trust companies were the slowest growers, with a median growth rate of 9%.
The growth in assets under management came mainly from market appreciation and contributions from existing clients; growth from new clients played a lesser role, said Mr. Hazlett.
The improved margins could continue through 1996, despite the less rosy market outlook for this year, said Mr. Hazlett. Thanks to the growth in assets during 1995, the managers are reaping higher revenue; clients also are slow to take assets from a manager when performance drops, he said.
The report also found compensation had improved overall among money managers, said Mr. Hazlett. While those results are still being tabulated, there are indications compensation is weighted more toward bonuses, not base salaries, he said.
This year's report includes data from 85 institutional, private client and retail mutual fund companies that responded to Investment Counseling's survey.
The final report will be released in early October and will include information regarding operations, salaries and other practices within the firms polled.