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This earnings season has not been a joyous one for asset management companies watching their profits plummet thanks to investor skittishness, rock-bottom interest rates, and a generally inert economy. Things are getting so tough, in fact, that some of these companies are actually trimming costs to try to make up some of the difference.
Lazard's (NYSE: LAZ ) sickly earnings report showed profits sliced in half since last year, prompting a cost-cutting binge at the usually extravagant firm. Compensation costs to operating revenue are high at Lazard, nearly 63% compared to investment brokerages Morgan Stanley (NYSE: MS ) and Goldman Sachs (NYSE: GS ) , which sport ratios of 52% and 44%, respectively. The latter two firms have also embarked on cost-reduction projects, cutting staff and, in the case of Goldman, selling off parts of itself in order to streamline operations.
Other big firms released bleak reports, as well. Janus Capital Group (NYSE: JNS ) saw a 44% decline in net income year over year, as the company struggles with investor flight, including customers from long-term investments. Invesco (NYSE: IVZ ) reported a 16% drop in profits, mild by comparison, but still substantial. Much of the nosedive in profits is due to the fact that customers are pulling their money out of the firms' funds. Over the past year, Janus has lost 10% of the total managed assets under its purview, while Invesco has lost 1%. Invesco has recently seen an influx of money into several of its funds, such as real estate, which has helped keep the company's stock from tanking.
It seems as if the troubles that these firms are experiencing are not due to individual ineptitude -- which is a good thing -- but are a byproduct of the general malaise afflicting the sector. The kinds of activity that brought in the big bucks before the crash have been curtailed, and it is hurting these firms where it counts. Even Lazard's CEO notes that a "magical recovery of times past," is probably not in the cards.
Where, in this new investment world, do asset management companies fit in? The sad truth is that some may not survive the tough times. There are a plethora of asset management firms in existence, which probably means that there could be more than a handful of buyouts in the next few years. The companies that remain will hopefully be stronger, and more able to withstand future recessions and episodes of investor anxiety.
That means that investors in this sector need to pay attention, monitoring the health of the various players in order to get the best returns. Meantime, the cost cutting will make these firms leaner, and either more robust or more attractive takeover targets. For investors, it sounds like a win-win.
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