In its annual UK investment management survey, ‘Pursuing profitability: all step forward …’, PwC warns fund managers that if current market trends continue, margins will halve to around 15% this year.

The report calls for competing fund managers to take collective action to address industry-wide obstacles to straight-through processing, including standardisation of communications and back office processes.

Graham Wright, partner, PricewaterhouseCoopers says: "For the first time in years, fund managers are facing a ‘double whammy’ of markets and pricing in simultaneous decline. This takes us into a new era, where profits will be much more difficult to maintain.

"If current trends continue one fund management company in five will report an overall loss."

The report notes a surprising drop in IT spend during 2000. "This seems to be due to discretionary project spend being challenged during the second half of the year as more pessimistic market forecasts emerged," says Wright.

The survey points to the importance of economies of scale to realise efficiencies. In many cases the scale has been increased through mergers and acquisitions in recent years. However, the industry remains highly fragmented and genuine scale rare.

Outsourcing is one solution, says PwC, but offers only limited benefits when implemented on a 1:1 basis. "Collaboration across larger numbers of businesses, negotiating and agreeing standards together with a common aim, and either sharing existing resources or negotiating together with a service provider could provide genuine efficient scale of operation," the report suggests.

Wright concludes: "Fund managers have enjoyed tremendous growth, but they now need to face up to some fierce challenges in the immediate future, many of which will be best faced together. Good profits are still available in this market, but only for those who are very clear about their proposition.”