U.S. asset managers are slashing expenses as they endeavour to deal with the economic downturn, yet they are still facing much lower margins, finds new research from Greenwich Associates.

The consulting firm reports that money managers are making radical cost cuts — on average 22% — in response to plummeting asset values. Greenwich says that U.S. investment managers’ portfolio assets declined in value by an average 31% in 2008.

“Small firms have been particularly hard hit by these declines due to deteriorating economies of scale, but even large firms have been forced to minimize costs to maintain effective scale,” it observes.

Greenwich says that 100% of the 47 executives that participated in a December survey said their firms experienced asset declines in 2008. Total declines on the year ranged from a low of 2% to a high of almost 67%. As a result, investment managers are projecting an average revenue decline of almost 33% from 2007 levels by the end of 2009. Some of the worst hit firms expect 2009 revenues to decline more than 43% from 2007 levels, it notes.

“Instead of cutting costs in line with revenues to reach ‘normal’ profitability, most firms are trying to position themselves for a rebound in the markets and cutting less in client-facing and investment areas,” says Greenwich Associates consultant Goran Hagegard. “This effectively means accepting lower margins in the short-term. Firms project operating margins to fall an average of 37% in 2009 from their 2007 levels.”

It adds that most managers are targeting their cuts on areas other than their investment management. Approximately three quarters of the firms cutting costs are targeting support services and/or investment operations, and about two thirds are targeting distribution and client services and/or information technology. “More than half the firms say they are targeting executive management, and this expense category could experience some of the deepest cuts,” says Greenwich Associates consultant Chris McNickle. “More than 30% of the firms looking to reduce executive management expenses say they plan to cut these costs by 15% or more, and an additional 17% say are looking to cut 30% or more.”

About half the firms surveyed said they are reducing headcount, eliminating almost 11% of employees on average. Key to managers’ cost reduction efforts will also be an average 29% reduction in bonus expense from 2007 to 2008, it says.

Despite these aggressive steps, declines in revenue are expected to outpace expense reductions, leading to lower operating profits in 2008 and 2009. Margins for 2009 are projected fall 37% from than those reported in 2007, Greenwich says.

The firms participating in the survey represent approximately US$3.2 trillion in assets under management, 32% have assets under US$10 billion, 47% have assets of US$10 billion to US$100 billion, and 21% have assets greater than $US100 billion.

IE