Fund managers' profits reach six-year high, but costs rise too

BRITISH fund managers tripled their profits to a six-year peak last year, but their soaring earnings were almost exclusively the result of booming market conditions rather than improved efficiency.

Fund managers' pre-tax profits as a proportion of their revenues rose from 18.1 per cent in 1992 to 28.8 per cent in 1993, according to a study published by Price Waterhouse Investment Management. The level is the highest since the survey began six years ago.

But in the same period costs were allowed to escalate by almost double the rate of inflation, leading to the conclusion that it was the improved market environment which inflated funds under management and hence fees.

The study found costs had risen on average by 39.8 per cent in the past six years compared with 21.9 per cent for the retail price index.

As a result, PWIM argues that the sector remains highly vulnerable to a downturn in the market.

'Long-term profitability of the fund management industry is not guaranteed,' said Andre Duncan, a PWIM partner. 'The industry has allowed a degree of cost inefficiency to build up, probably . . . as a result of enjoying the benefits of continually rising revenues.'

This compared unfavourably with other sectors of financial services such as banks, where real progress was being made in holding down costs, he added.

The study also looked at product profitability, concluding that investment trusts remained the most profitable type of product followed closely by main insurance funds. The only main product group not to have become more profitable over the past year was PEPs, where losses have increased.

Collective investments, principally unit trusts, had a boom year driven by a big increase in marketing spending, where the proportion of total costs rose from 24 per cent in 1992 to 37.6 per cent.

The survey looked at 41 investment managers handling pounds 500bn of assets, more than half the total managed in the British Isles.

----------------------------------------------------------------- PRODUCT PROFITABILITY ----------------------------------------------------------------- (margin on revenue) % Investment trusts . . . . . . . . . . . . . . 42.9 Main insurance funds . . . . . . . . . . . . .42.5 Pooled insurance funds . . . . . . . . . . . .36.1 Pension funds & charities . . . . . . . . . . 30.7 Retail funds . . . . . . . . . . . . . . . . .29.2 Private clients . . . . . . . . . . . . . . . 17.1 PEPs . . . . . . . . . . . . . . . . . . . . -31.0 -----------------------------------------------------------------