Morningstar
February 5, 2009
Brett Horn: Hello, I’m Brett Horn, associate director of equity research of Morningstar with the dramatic plunge of the market’s of the last few months, many investors had the unfortunate experience of watching the value of the portfolio drive died dramatically. There’s a group of companies that we cover here at Morningstar. There are much the same about money management companies. I’ve invited our analyst who covers this company Greg Warren to come and discuss the state of the industry with me. Thanks for joining Greg.
Greg Warren: Thank you.
Brett Horn: So we knew the forth quarter was going to be ugly. These company’s revenue basis are tied to asks our manager which are tied directly to the level of markets but just how ugly where they went and what are the numbers look like?
Greg Warren: Well, in a lot of cases, you’ve had fourth quarter assets on our management declining by as much as 20 percent and for the year, most of the major companies tract the market you know with the 35% to 40% decline and all answers in the management. So everybody’s in the same boat, some are in a little worst shape than others, some saw more out flows from their funds because of poor performance and some are hit you know mainly by performance and but that same made on certain sectors like financials.
Brett Horn: Can you give some specific example of some who performed better or certainly expected?
Greg Warren: Black Rock actually performed a little bit better than we we’re thinking. I’m on an asset or management basis. Their assets and our management here in the fourth quarter were down 4% and we’re only down 14% for the year. The reason for that is they have more fixed income and cash management, operations within their portfolio so the declines from the equity side actually stayed in house and went into cash management or in fix income. So they had some benefit there and we can look sort of the poor performers you know like in invest, go ahead nearly 30% decline in the assets under management and a lot f that was you know equity driven.
Brett Horn: Now startly this is an industry with pre-fat profit margins but when you see revenue declined 20 to 30%, those margins could disappear in a hurry. Where are this companies do and they back at?
Greg Warren: right, you know the issue for a lot of these guys is that you know because their revenues are third directly to their assets under management and because revenues were declining at ½ times. Its not more than assets and their management. They had to really start addressing their expense line, which traditionally doesn’t happen for this industry. I mean, normally, you’ll ask revenues come in and most of that falls down in the bottom line because you don’t really have to hire more people to save the manager to some billion dollars of assets.
So in this scenario, we have 20%, 30%, 40% declines in revenues, they have to start looking at you know the contracture of their business and the biggest cause for them is employee conversation and so they had to make it start. Make some difficult decisions about head count and potentially you know bonuses and whether not to pay bonuses or how they arrange bonuses. So we started to see some of that already. Companies have been laying off and you were between 5%, 10%, 15% of their sales or their—not the sales but their actual employee base without really dipping into the investment managers.
But even with that, we still saw a thousand basis [point declined and you know that’s 10% each points down in profit margins here over a year.
: And when we look at the fourth quarter and where profit margins were in the revenues you know had settled down, we’re thinking that that’s how 2009 is actually going to look in a lot of cases. Because again, they’re starting 2009 with the much lower level of assets under management, which means that are generated over those assets are going to be much lower than they were at this time last year. So as we worked through the year, unless we have a dramatic optic in the market. Your going to see a significant reduction revenues here and profitability and again, their going to need to really look at where they can cut cost, additional causes they move through the year.
Brett Horn: No, sir you know the industries under stresses this. Its going to lead to winners and losers and if so, how do you differentiate it? How do you pick the learns in this issue?
Greg Warren: We think that longer term is going to be those at are larger, more assets under management, a better product portfolio and that its more diversified with new equity fixed income balance cash management. They’re going to be the ones that are going to survive through this. They’re going to be the ones that are going to thrive if they are going be consolidating the industry. Those that are single manager style sort of businesses, some will probably survive. Some will be you know taking over and some may just close you up. The investors should be looking at this you know as buying into these companies. Buying into this individual companies and their futures I suppose to say. Buying a stock that might be cheap.
Brett Horn: Okay, well thank you very much Greg. I’m Brett Horn from Morningstar, thank you for doing this.
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