“The financial crisis was a reminder of the benefits of having a diversified business model,” said Martin Gilbert, chief executive of Aberdeen Asset Management PLC, Aberdeen, Scotland. Aberdeen continued to improve operating margins to 45.4% in the year ended Sept. 30, compared to 40.6% the previous year, despite net outflows of £2.5 billion ($4.16 billion) due largely to weaker sentiments in fixed income. In 2009, the company's operating margin was 22.7%.
Managers able to improve margins in the future, however, will more likely be those that can diversify their business using existing platforms so as to minimize additional costs, said Geoffrey Bobroff, president of Bobroff Consulting, a money management consultant firm in East Greenwich, R.I.
Mr. Bobroff cited AQR Capital Management LLC, as an example. David Kabiller, co-founder and head of client strategies at Greenwich, Conn.-based AQR, said the firm has benefited from having “a set of strategies that has diversification in and of itself.”
The same research platform at AQR supports three business lines — hedge funds, traditional long-only strategies and risk parity. In 2013, long-only strategies benefited from robust equity beta, while risk parity outperformed in the years immediately following the 2008-2009 financial crisis. In the past couple of years, AQR also has been developing capabilities in credit strategies to further diversify its business.
AQR, a largely institutional money manager, has also successfully introduced alternatives mutual funds to the marketplace to further diversify its client base. In the past five years, AQR has gathered about $16.9 billion in mutual fund assets, and separately subadvised another $19.3 billion.
Business diversification may not result in improved margins, particularly in the short term when the cost of adding new capabilities outweighs increasing AUM.
Schroders PLC, for example, has made several acquisitions to diversify into new businesses, including the purchase of wealth manager Cazenove Capital Holding Ltd. in July. But while assets under management have increased 37% to £256.7 billion as of Sept. 30 vs. £187.3 billion at year-end 2011, net revenue margins dropped slightly to 55 basis points from 57 basis points during the same period. Schroders does not report operating margins.
“There is a J-curve effect with new products and markets, but this is just one aspect of the entire picture,” said Miles O'Connor, head of pan-European institutional distribution at Schroders in London. “There are hundreds of other things happening behind the scenes (driving profitability). When we look at how to develop our business, we do look at new opportunities as an integral part of laying a strong foundation for growth in the long term.”
“Our multiasset, multistrategy business model allows us to play different market trends amid changing regulatory conditions,” Mr. O'Connor added.
Others have had to diversify for survival. At Record Currency Management, a business model that was heavily dependent on carry-trade strategies prior to the 2008-2009 financial crisis was forced to undergo a drastic transformation due to market sentiment away from active currency management.
When Record was first publicly listed in 2007, active currency strategies accounted for about 50% of total assets under management and about 90% of revenue, said James Wood-Collins, CEO of Record, Windsor, England. As of Dec. 31, only 5% of the total AUM was invested in active currency strategies, which contributed 14% to the company's revenue.
Dynamic hedging and passive hedging accounted for 24% and 71% of the total AUM, respectively, and 64% and 22% of the revenue. The hedging strategies don't command fees as high as active currency strategies, and Record has also reduced fees in certain currency risk management strategies to remain competitive.
Timothy Pollard, P&I's data editor, and Yi Du, digital producer intern, contributed to this story.