Asset management benchmarking insights

After a challenging 2022 which saw markets broadly in the red and financial results of asset managers following suit, 2023 ended on a much more positive note, despite the rally only coming in late in the last months of the year. Most of 2023 saw markets whip-sawing with some concentrated rallies, with the year still buffeted by continued geopolitical conflicts, market and corporate failures driven by digital asset blow-ups, valuation plunges and distressed pricing. In our recent financial benchmarking of asset management companies in Singapore based on calendar year 2022 reports, the experience of asset managers differed depending on the primary investment strategies in which they focus. Traditional public markets and hedge fund managers started the year on the back of higher costs in 2022, thus necessitating a refocus on managing costs in 2023. Private asset managers on the other had continued to show resilience given the broader investor interest in deploying capital into alternative strategies, thus delivering better financial performance and profitability.

Asset managers are likely to move cautiously in 2024, although the expectation is that the 2023 financial performance may be somewhat more positive compared to 2022. Asset managers will continue to face headwinds as they start the new year. On the one hand, what else could go wrong, while on the other, some light is coming through pointing to areas where good opportunities may abound. Whatever the case, much remains for the asset management industry in Singapore to stand tall and push on to win in the increasingly complex marketplace, but also keeping an eye on preparing for the future.

Managing costs in 2024 will continue to be a key focus, and outsourcing or near/offshoring non-core functions will take pace to help alleviate the talent crunch in operations, finance, risk and compliance roles. An eye on pivoting more towards alternative investments will also drive the development of investment expertise and sales in alternative products. Changing demographics, regulatory push and financial sector resiliency may also see a shift towards previously closed (from an inbound perspective) markets such as Japan, Australia and India in 2024.

Whichever the case, the one critical element to sustainable success in 2024 is the need for asset managers to lay up the foundation for growth in the coming future. While we may not be able to predict the future with any level of accuracy or confidence, one thing is for sure - asset managers must continue to invest in people, technology and build a strong sense of identity and purpose with clients and the marketplace, even if they may not see the fruits of their labour for years to come.

As a Greek proverb goes, a society grows great when old men plant trees in whose shade they shall never sit. Building the greenest forest of the future starts with planting a single tree, and this needs to be the opening call in 2024.

Justin Ong
Asset and Wealth Managed Services Leader, PwC Singapore

PwC’s Asset and Wealth Management practice is pleased to share with you insights from the annual benchmarking review carried out in relation to the financial key performance indicators of selected asset managers in Singapore.

Our benchmarking insights is designed to gather, analyse and share information about key industry trends and metrics. This report summarises the key financial information relevant to asset managers in benchmarking their financial performance against industry peers. Because of the selected types of participants, diverse size and nature of operations as well as differences in the application of transfer pricing policies and accounting policies with regards to recognition and disclosure of rebates, commissions and other fees, these insights should not be considered representative of all asset management firms in Singapore.

In carrying out the benchmarking exercise, we obtained information based on publicly available financial statements, data from the Investment Management Association of Singapore (IMAS) Members Directory, the Accounting and Corporate Regulatory Authority (ACRA) and other news sources as applicable. As a result, there are some limitations on the information available in terms of comparability especially where financial statements pertain to different reporting periods. For instance, the assets under management (AUM) and headcount of many private equity and hedge fund companies are not publicly available or disclosed. To ensure best comparability, we have also made certain adjustments especially in relation to fees, rebates and commission expenses – where these have been disclosed as gross expenses, we have taken these to net off against gross revenue, so all revenue numbers used are adjusted net revenue numbers.

We hope that you find this report interesting and useful as you evaluate your organisation on the topics highlighted herein.

In 2022, asset managers faced a formidable challenge as they navigated through a tumultuous market landscape. Major market indexes witnessed substantial year-on-year declines, with the Nasdaq Composite at -33.1%, Russell 2000 at -21.6%, S&P 500 at -19.4%, and Dow Jones Industrials at -8.8%.¹ The global AUM fell by 10%, and Singapore’s asset management industry also declined by 10% to S$4.9 trillion while the net inflows remained healthy at S$435 billion.²

Amid this volatile market environment, among the 44 asset managers we selected for this report, the financial performance of global asset managers (GAMs) and hedge fund managers (HFs) was notably weaker on average. In contrast, private equity firms (PEs) continued to offer diversification from the macroeconomic climate and maintained robust financial performance.

GAMs saw their average cost-to-income ratio (CIR) rise by 5.56% to 77.38%. Meanwhile, their average return on equity (ROE) experienced a significant decline from 51.57% to 41.12%, and the employee compensation as a percentage of total cost (employee cost %) decreased slightly by 1.19% to 46.80%.

Hedge funds, in comparison to GAMs and PEs, exhibited the highest average CIR and employee cost % and the lowest ROE at 80.00%, 69.57%, and 31.12%, respectively.

Private equity firms stood out with the highest average ROE in 2022, recording 69.59%, marking a 2.70% increase from 2021. While their average CIR decreased to 61.70%, their employee cost % rose to 69.16%, surpassing global asset managers (GAMs) and almost on-par with hedge funds (HFs).

In summary, the year 2022 tested the mettle of fund managers as they grappled with challenging market conditions. Amidst market turbulence, private equity firms demonstrated resilience, while hedge funds faced distinctive hurdles.

_{¹ Bloomberg.
² MAS Asset Management Survey Report 2022.}

Financial KPIs in asset managers

While the core business model of asset managers may appear similar, each asset manager possesses a distinct investment scope, strategy, and market focus, leading to variations in their financial performance.

In 2022, private equity firms demonstrated the lowest average cost-to-income ratio when compared to hedge funds and global asset managers. These metrics highlight the efficiency and cost-effectiveness of private equity firms in managing their operations partly due to the nature of business and operating scalability.

In terms of return on equity, private equity firms emerged as the top performers, boasting the highest average return. In contrast, hedge funds reported the lowest return on equity on average. These figures underscore the superior profitability and performance of private equity firms in the financial landscape, under the current economic and financial market environment.

In 2022, PEs had a better overall performance --- higher average revenue and return on equity, lower cost to income ratio, employment compensation over total cost, and employee compensation over revenue. On the other hand, GAMs and HFs experienced decreasing average revenue and average return on equity, and an increasing average cost to income ratio and employee compensation over revenue.

Revenue measures

The revenue streams of asset managers typically consist of management fee, performance and distribution fees. Without considering all other factors such as AUM, headcount, and distribution to paid-in (DPI), GAMs had the highest average revenue in 2022 at S$131.70m. PEs had the lowest average revenue at S$41.22m but the highest average increase of 45.35% and the only group of asset managers to increase their revenue year-on-year (YoY).

Cost to income ratio

The CIR evaluates the efficiency of a company’s operations. A lower CIR is generally considered better but companies in their early stages might have a higher CIR due to the initial investment required to establish their operations.

In 2022, the average CIR of asset managers remained above 60%. The average CIR of GAMs and HFs increased by 5.57% and 4.78%, respectively, and that of PEs decreased by 11.45% year over year.

Return on equity

The ROE measures the company’s profitability for shareholders, and therefore a greater figure depicts higher profitability. However, ROE can be affected by various factors such as fee structure, investment performance, AUM growth, operating expenses, client withdrawals and redemptions, etc and should be used in conjunction with other financial ratios. In 2022, PEs had the highest average ROE while HFs had the lowest ROE. GAMs and HFs have a decrease of roughly 10% while PEs have a slight increase of 2.7%.

Employee compensation

On average, the employee compensation contributes to over 60% of the total cost across GAMs, HFs, and PEs. Overall, HFs had the highest average employee compensation over total cost and employee compensation over revenue, and GAMs had the lowest value in both.