Fund managers need to bolster their defences to deal with the tough economic year ahead
Nicola Horlick has been making the news again. Not content to take a back seat, however comfortably padded, and just run a decent asset management outfit without too much song and dance, the City's superwoman burst upon the media stage last week once more, demanding her fund manager colleagues wake up and smell the burning coffee.
The FTSE, she warned, was quite ready to hit 3,000 if there was any sort of terrorist outrage perpetrated in the near future, and the investment industry had better find a way of operating profitably in a far tougher environment than it was used to. Firms have got used to carrying second and third rate people and paying them top whack, she added. But now the easy days are gone. No more £1,000 lunches or £100,000 bonuses.
Staff at fund management firms have so far been largely protected from the market slump, with investment banks taking the brunt of cutbacks. A year ago, the global economic downturn was widely believed to be a two-quarter blip. The view then was it would be cheaper to hold onto a highly trained workforce, because no firm wanted to be caught short when the rebound occurred. From bitter experience, companies know that if you rely on voluntary redundancies, it is invariably the bright ones who quit, leaving the dead wood behind. This year, as the weeks turned to months and the prospect of sustained economic recovery receded, job losses mounted at the banks. Now it is time for fund management operations to feel the steel.
SG Asset Management, Horlick's own business, has cut 13.5% of its workforce in the past two years. Double digit cuts are not uncommon elsewhere in the industry, and in total the City has lost over 25,000 jobs over this period. Corporate news confirms the slowdown, with several groups reporting sharply lower profits due to declining broking and investment banking activities.
Horlick has raised the alarm, but for some months firms have been quietly bolstering their defences against the stormy outlook. Banks like ING, West LB and Credit Suisse have been consolidating their capital bases. There have been a string of disposals of smaller non-core or associated businesses, a wave of outsourcing of non-core functions and a surreptitious but ruthless clean out of non-performing loans from portfolios.
Fund management houses have not exactly been sitting about either. Product ranges are being merged, split, dissolved and only very rarely added to. Fund managers are moving jobs at an unprecedented rate, positioning as best they can for either an upswing or a long period of hibernation. Further corporate activity is unavoidable, and the industry realises that if things get ugly, they can expect no help from any government.
A rising market would take care of most of these problems, but the outlook for 2003 is more sluggish growth and volatility, before some slight improvement in 2004. Some firms are hoping that with a bit of readjustment, their business strategy can hold out that long. It is a big gamble, since the global backdrop could easily get a whole lot worse. War, high oil prices, public sector wage demands, private sector debt and policy errors will crucify investor sentiment. Horlick's words have definitely touched a nerve. The regulators are delighted that someone else has said bluntly what they have been trying to suggest, in a more delicate way, for months. To the retail punter, it makes sense. If they grasp it, fund management firms have a golden opportunity to do a Gordon Brown, and blame the cruel world out there for some mean decisions in here.
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