In a Dismal Year for Funds, a Winner Is Emerging in Pandemic
(Bloomberg Opinion) -- As this dismally depressing year approaches its mid-point, a winner is starting to emerge from the pack of European fund managers. And while sheer scale and a diverse business model have helped DWS Group GmbH weather the first phase of this pandemic better than its peers, the firm’s ongoing frugality is what really sets it apart.
The shares of asset management companies typically mirror the broader stock market, rising and falling as a proxy for equities generally. Before the novel coronavirus outbreak trashed markets toward the end of February, DWS was handily leading its rivals. Since equities have recovered, the Frankfurt-based company has rebounded to become the only European asset manager in positive territory for the year.
Cost is one of the few variables a fund-management company is able to control, and investors are rewarding DWS, which manages 700 billion euros ($791 billion), for its focus on frugality. Chief Executive Officer Asoka Woehrmann has been on a cost-cutting drive since his appointment as head of the company in October 2018, seven months after Deutsche Bank AG sold and listed about a fifth of the business, retaining an 80% stake. Earlier this month, Woehrmann shrank his management board to six members from eight as part of efforts to save at least 150 million euros a year.
For asset managers’ cost-to-income ratios, the direction of travel matters at least as much as the absolute level. DWS reduced its key measure to 65.8% by the end of the first quarter, down from 70.9% at the end of 2018 and more than 74% in mid-2018. It promises more to come. “We can still expand our savings efforts,” DWS Chief Financial Officer Claire Peel said in an interview published by Boersen-Zeitung last week.
At the asset-management business of M&G Plc, which oversees 323 billion pounds ($407 billion), the cost-to-income ratio worsened to 63% at the end of last year from 59% a year earlier. Some of those additional expenses came as it adjusted to life as a stand-alone company, after being spun out from Prudential Plc in October.
M&G has pledged to cut spending by an annual 145 million pounds in the next few years. In March, the London-based firm introduced a voluntary redundancy program aimed at trimming personnel expenses by 10% this year, but the virus may have blown that off track.
Amundi SA, Europe’s biggest asset manager, with 1.53 trillion euros of assets, remains the market leader in stinginess, with its cost-to-income dropping below 50% at the end of March, down from an already impressive 53% at the end of 2018. But that leaves limited scope for further savings at the Paris-based company.
Both DWS and Amundi have sizable suites of index-tracking products available, enabling them to ride the wave of investor enthusiasm for lower-cost passive products while their peers are stuck trying to extol the benefits of active strategies. As I wrote in May, stock pickers were unable to beat their benchmarks in either March or the first quarter as a whole — a period of market convulsions that should have been the time for active management to shine. It’s a lackluster performance that will only exacerbate the shift to index tracking.
The fund management industry has faced straitened circumstances for several years. This year’s share-price action suggests shareholders will continue to favor those firms best able to play the parsimony game. With the income side of the equation looking as fragile as ever, more belt-tightening lies ahead.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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