Goldmans fears for Schroders in fund manager downgrades

Asset management firms are being battered by a string of headwinds, prompting Goldman Sachs to issue a slew of share price downgrades.

The influential investment bank says that assets under management (AUM) at some of the top fund management groups are set to weaken on persistent market turmoil, and flows will be dented by continued volatility.

'European equity markets fell as much as 25%in Q3 11.  This will inevitably impact fund returns and we expect the erosion of value to be most keenly felt in asset managers with an equity bias to their AUM,'  Goldmans' Chris Turner said, citing Schroders as a group likely to be hit.

'Asset managers with a large retail investor base are set to be hit hardest by diminished asset flows,' the bank's diversified financials analyst Turner added.  'As Q311 progressed (and volatility increased), flow trends across most product classes deteriorated,' he argued.

Margins to be squeezed in market crunch

Moreover, revenue margins will be hurt by the widespread decline in equity markets, and violent foreign exchange swings have been piling further pressure onto groups' AUM.

Goldmans says this heady cocktail will spark a sector-wide derating and has cut its forecasts for Schroders and specialist emerging market investment manager Ashmore as a result.

The bank has reduced Schroders' price target to 1,550p from 1,850p, and cut Ashmore's from 460p to 380p.  It also trimmed back its forecast for Aberdeen Asset Management from 260p to 210p, attributing its call to significant redemptions from Aberdeen's emerging market equity funds during August and September.

Across the entire sector, Turner believes the ensuing eurozone crisis will have a dramatic impact on some asset managers, highlighting how the sovereign crisis had a big impact during the sector quarter.

Turner said: 'Eurozone sovereign debt concerns, the S&P downgrade of US sovereign debt instruments and concerns over the sustainability of economic growth in Asia all conspired to drive European equity markets significantly lower in Q411. 

'European markets declined by 14% to 25% versus our annual equity returns forecast of 7%.  These volatile conditions have continued into Q411.  These declines directly impact  the AUM of European asset managers under our coverage.'

Turner continued: 'We note, for example, that Aberdeen experienced a $8.1 billion negative investment return over the five months to the end of August, compared to our normalised performance forecast of positive $4 billion.  Based on EFAMA data to the end of July, market declines reduced the AUM of European asset management industry as a whole by $319 billion, since the start of the year.'