European Fund Management costs fell last year, according to a study by the management consultancy, McKinsey. The study also showed that aver...

European Fund Management costs fell last year, according to a study by the management consultancy, McKinsey. The study also showed that average profits rose last year by 9 per cent, to 13.9 basis points of total assets. “Profits of 13.9 basis points are huge because the assets managed are huge,” said Andrew Doman, a McKinsey director, who was quoted in the Financial Times. “This is a very profitable industry because the capital requirement is modest.” The McKinsey study looked at 110 European firms with total assets of $5.2 trillion. Among the findings, the study said most firms had made attempts to rein in costs by outsourcing IT and back office functions and relying more on technology, or quantitative techniques, for investment management. The increasing polarization of fund management into distribution and manufacturing had given some distributors economies of scale. But personnel costs were still high, according to the study. Any fall in staff costs was due to reduced headcount, not lower wages. “Fund manager costs worry me. They are out of control, driven by the growth of boutiques, multi-boutiques and hedge funds, all offering richer rewards,” said Mr Doman in the FT article. Mr Doman also said fund managers need to concentrate more on their brands than on creating star managers and giving them celebrity status. Profitability might be good overall, but much of the industry needs to change to maintain this, said the report, particularly in the event of more market falls. Many companies had yet to outsource non-core functions. “The market for services such as custody, record keeping and transfer agency has improved enormously,” said Mr Doman in the interview. “There is really no excuse for doing it yourself any more.” The study showed that, in the UK, independent firms had profits of 10.4 basis points of assets, compared with just 2.4 basis points for captive asset management firms. And funds run by boutiques had outperformed captive asset managers by several hundred basis points over the last few years, according to the report. “Captive management firms should look at themselves and ask if they are distant enough from the parent, if they are creative enough in building a multi-boutique structure. Many are being constrained, possibly fatally,” said Mr Doman in the FT article.