Another poor ISA season leaves fund managers gasping

With investors still shunning equity markets, fund managers are struggling to justify the high prices paid for them
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The Independent Online

With ten days to go before this year's deadline for the end of the annual selling frenzy of individual savings accounts (ISAs), gloom has descended upon the fund management industry.

With ten days to go before this year's deadline for the end of the annual selling frenzy of individual savings accounts (ISAs), gloom has descended upon the fund management industry.

Industry insiders believe that this year has been less of a frenzy and more of a flop. Estimates are that ISA sales are 30 or 40 per cent down on a year ago – which was itself markedly down on 1999.

It is a grim turn of events for fund managers. The ISA season of January to the end of the tax year on 5 April is a crucial time of year, when investment companies are usually at their busiest, picking up a substantial amount of business from retail investors.

Yet the 24 per cent fall in the FTSE 100 in the past two years, leading to most people's ISA statements being in the red, has not encouraged investors to have a punt on the market this year, despite the lure of tax-free investment which ISAs promise.

The final result for this year will not be known until after 5 April, but figures produced by the Investment Management Association show that total ISA sales from April last year to this January stand at £5.7bn, only just over half of the full-year result from 2000 to 2001 of £9.9bn. Most companies are trotting out the line that a last-minute upturn is expected. But many have privately written off this year and have scrapped the usually enormous advertising budgets usually spent at this time of year.

Fund managers have been hit by a double whammy. As well as not pulling in much new revenue, their existing funds under management have dropped dramatically due to the fall in equity markets. This has wiped millions from their fee incomes, which are largely tied to their investment performance. Yet costs, which are mainly fixed, have risen in relative terms.

The problems facing asset managers now have taken the shine off the sector, leading many of the companies which snapped them up in the boom times of the late 1990s to think again. Commerzbank, the German banking giant which bought Jupiter Asset Management for £800m in 1999, has put the business up for sale and it emerged this week that Barclays bank is thinking of spinning off Barclays Global Investors, one of the biggest fund managers in the world. Royal & SunAlliance has also been trying to flog its asset management business for months, but so far no buyers have come forward.

The situation raises past spectres of banks leaping into new markets only to get their fingers burnt. In the late 1980s they rushed to buy up estate agencies believing that property prices were on a never-ending rising trajectory. They were not and banks had little choice but to cut their losses, famously forcing Nationwide building society to sell its 300-strong estate agency chain for less than a penny each in 1994 and Lloyds TSB to write down a £100m loss when it offloaded its Black Horse business to Bradford & Bingley in 1998.

The City does not expect the fall-out from acquisitions of fund managers to be nearly as dramatic, but there is a growing realisation that some institutions overpaid dramatically during the spree of acquisitions in the 1990s. Others which may not have overpaid are still left with the need to cut back on revenue projections from the businesses.

Gordon Aitken, an analyst at Credit Suisse First Boston, believes Prudential's acquisition of M&G in 1999 for 10 per cent of its funds under management looked highly valued at the time and now appears very dear.

"Expectations have come down and people are no longer looking for double-digit returns from the equity markets, so a multiple of 10 per cent looks way too high and if Pru were buying M&G now they would not have to pay that multiple," Mr Aitken said.

This is born out by the City's valuation of listed fund managers. The giant financial services company Amvescap, which has swallowed a series of asset managers including Perpetual in the UK, has seen its shares trade on a falling multiple of funds under management, down from 4 per cent at the end of 2000 to 2.7 per cent now. This drop is a response to difficult markets but it is also due to the encroaching threat to straight-forward fund managers of specialists such as hedge funds, which have picked up market share and have thrived in the recent falling markets.

Rob Down, an analyst at Morgan Stanley, predicts Commerzbank will not get back the money it has spent on Jupiter. And the feeling is that even BGI, which is flourishing but heavily dependent on low-margin passively managed business, may have been put up for sale by Barclays' sharp-eyed chief executive Matt Barrett because the business' peak profitability had been reached and it may be downhill from here.

The sell-off is likely to be limited. The Pru restructured its business last year but very forcefully said that M&G remained a core constituent. Martin Cross, an analyst at Teather & Greenwood, points out that the strategy for buying asset managers in the first place still holds true. "Banks bought fund managers to improve their return on equity because margins on net interest income [from mortgage and unsecured lending] were being squeezed. This pressure still applies. And, while fund managers are unlikely to be as profitable as in their first years of ownership, it does not make sense to buy at the top and sell at the bottom," Mr Cross said.

Meanwhile, the fund managers are having to deal with what many believe to be the toughest times since the recession just over a decade ago. Mark Dampier, the head of research at the brokers Hargreaves Lansdown, said: "It would not be at all surprising to see some brokers, especially discount brokers which do not have a relationship with clients, to be forced into mergers or to go bust."

The upturn the industry hopes for is not just an increasing positive momentum in the markets but also the return of confidence by investors, but among all but the most sophisticated investors, that is not expected for sometime.