Fund industry job losses a sign of the times

Most people in the fund business are hard pressed to remember a more difficult time. Like other industries, the money management sector is feeling the heat of the massive global recession, which has necessitated trimming back the workforce.

The latest fund company to trim its workforce is Toronto-based AGF, which confirmed 42 departures on Wednesday — roughly 5% of its workforce — as part of ongoing cost efficiency measures. Like many of its competitors who have also recently gone through restructuring, many of the jobs were administrative, support or technical back-office jobs.

Two analysts did lose their jobs but no portfolio managers have been let go and Lucy Becker, the firm’s vice-president of communications, emphasized that there will be no structural changes to the way the company does business with advisors.

“We remain strongly committed to the relationships we have with advisors and continuing to provide value to our clients, particularly during these challenging times,” she tells Advisor.ca.

For independent fund industry analyst Peter Loach, AGF’s cuts are reminiscent of what most of their competitors are doing: essentially trimming the fat during a very lean sales period for actively managed investment products.

“I can’t remember when there were cuts to this extent and we know it’s not going to be a good RRSP season,” Loach says. “I really don’t see what’s happening in the fund industry being that much different from any industry if sales are considerably lower.”

Loach points out that none of the fund firms that have streamlined their workforce, which now include, Fidelity, DundeeWealth, CI Investments and AIC, tend to be focused on sales support and back-office administration jobs.

What no firms have done as of yet is cut their key service: money management. To Loach’s knowledge, not a single portfolio manager has been let go during the waves of cuts.

This makes it hard to determine what the cuts mean for the industry in the long term. Deep cuts to money management would be the kiss of death in the eyes of many analysts, since such a move would hamstring the firm’s product line for when the stock market recovers.

The only area Loach sees where missteps could be made is if a firm cut too deeply on its outside sales teams. In his view, wholesalers can make a difference on the net sales, because while gross sales may be down, establishing strong advisor-client relationships can stem the tide of redemptions and switches into money market funds.

“If a company considers itself a going concern with the advisor market, it needs to be embracing those relationships in this environment,” he says. “Wholesalers are going to have to work a bit harder than they have in the past with existing accounts. They are certainly going to have to work even harder for every new dollar entering the complex.”

Loach emphasizes that the downturn has had a silver lining for the fund industry. For starters, active managers of long-term funds have proven their value in protecting client capital on the downside of the market.

Recent reports from Standard & Poors and Russell Investments outlined that the majority of Canadian equity managers outperformed the S&P/TSX Composite index during the worst of the downturn. In the case of the Russell report, 72% of active institutional managers beat the benchmark.

Whether or not it is an aberration, as some passive investment advocates contend, the data is a shot in the arm for the marketing departments of fund companies, providing ammunition to defend against the encroachment of exchange traded fund providers into the retail mutual fund space.

“[ETF providers] are just looking for a piece of the pie. We’ve seen things get really bad in the last eight months, and who manages the risk on passive products? The answer is, no one,” Loach says. “Investors have to ask themselves, is their primary concern to be fee-conscious or do they care about results?”

Ultimately, the biggest shake-out from the fund industry’s current troubles could be another round of consolidation, not unlike the one that occurred when the dot-com bubble burst at the beginning of this decade.

Asset management firms whose shares trade at historical lows are ripe for the picking by larger competitors who have weathered the storm better. Loach says there is speculation that CI Investments, which has a reputation for being a very robust and efficient operation, is well positioned to be an industry consolidator.

“I think you’re going to see consolidation. CI, for example, has additional lines of financing in excess of $1 billion,” he says. “I also think you might see more boutiques pop out on the distribution side when things get back to normal, but I don’t think you’re going to see 100% of the jobs that have been lost return.”

(02/20/09)