UK asset firms are heavily overstaffed

The UK's largest investment firms are heavily overstaffed in relation to their asset bases, according to research by Financial News. Fund management companies have not cut overheads fast enough to keep pace with the plunging value of assets and thousands more jobs in the sector will disappear before profitability is restored.

The three-year bear market has reduced the value of assets, on which fees are based, and profits at fund management firms have dropped because of high costs and falling returns.

Capital International is the most efficient firm among the top 10 UK fund managers, where every front-office employee manages more than 1.2bn (€1.7bn) (see table).

Henderson Global Investors, where each front-office employee oversees an average of 251m - nearly five times less than at Capital - is at the bottom of the table.

Financial News calculates that the average front-office employee at some of the largest fund managers in the UK runs between 500m and 600m. Assuming an all-inclusive fee of around 30 basis points, the average UK fund manager generates 1.7m in fees.

One analyst says: 'Given that that money has to go towards the manager's basic pay, his bonus, his national insurance, his pension, his secretary's salary, administration, research, office space and so on, it just doesn't add up.'

In February, Henderson Global Investors, owned by Australian insurer AMP, reduced its staff by more than 100 in its first round of redundancies. A further 130 were offered unpaid holiday and extended breaks ranging from a week to three months.

A Henderson spokeswoman says its efficiency ratio was skewed by the large number of property staff the firm employs. She says its 134 property managers are not all front-office staff.

'If you looked at our profitability by fund manager, especially based on what we would consider fund managers rather than professional resources, Henderson would be significantly higher up the league table,' she says.S There is a strong correlation between managers that have struggled to retain assets and those with poor efficiency ratios.

Among the smaller fund managers that did not fare well were Aberdeen Asset Management, Edinburgh Fund Managers and Baring Asset Management. All have struggled to hold on to clients in the past year.

Edinburgh's managers run an average of only 113m, a 10th of the total at Capital, while Aberdeen's average is lower at 104m. Baring Asset Management managers each run 203m.

David Ledster, global head of KPMG's investment management and funds practice, recently said: 'The funds industry has been grappling with huge systemic problems. This has not gone far enough and has too often been a tactical short-term response. The industry needs a new set of tools and creative thinking that will produce a scalable, variable-cost model that can flex with market demands.'

Passive managers work at some of the most efficient houses. Legal & General Investment Management staff each run more than 1bn, though indexation managers require relatively few staff and such firms are forced to run tight ships because their fee levels are small.

Financial News produced its efficiency ratio by dividing the number of a firm's front-office personnel by its global assets. The most efficient firms employ staff who manage significantly more assets than the least efficient investment houses.

All data was taken from Hymans Robertson's annual Big 50 publication, dated December 31, 2002.

Areas considered front office comprised global equities, UK equities, international equities, bonds, property, other products, strategy/ economics and asset allocation.

The efficiency ratio does not take into account fee revenues, which can vary widely. Equity mandates charge much higher fees than bonds and UK pension funds accept higher charges than plan sponsors in regions, such as Germany, where institutional fees are often half those in the UK.

Barclays Global Investors, the largest UK fund manager, could not be measured as it did not submit its staff numbers for publication in the Big 50.

The inefficiency of several successful fund managers follows last week's publication of a report by Watson Wyatt, the global consultancy, which found that more investment professionals are leaving the industry than at any time over the past seven years.

Nick Watts, European head of investment consulting at Watson Wyatt, says: 'These results are not surprising; they reflect an industry with excess capacity at a low point in the investment cycle and one that expanded rapidly in the bull market of the 1980s and 1990s.'