Significant differences in the quality of asset managers' earnings

Translation: Original published in Finnish on 09/24/2025 at 09:46 pm EEST

In this article, we review the quality of earnings of listed asset managers. In summary, the quality of earnings varies significantly within the sector, but on average, the level is quite good. The level has also improved in recent years, as the share of recurring fees has increased. We note that we have made the comparison at the group level, and thus the comparison does not account for the companies' differing business structures. We excluded Aktia from our review as the necessary information on its asset management is not available.

The earnings performance of listed investment service companies has been flat in recent years, with an average decline of about 20% from the record levels of 2021. With our 2025 estimates, only one asset manager will exceed its 2021 results. The rather weak performance is mainly explained by a decline in performance fees across the board (usually highly profitable) and a generally challenging market. In addition, several companies have faced challenges with alternative products, especially with their real estate funds. We note, however, that the profitability of sector players has held up very well, and we discussed this topic in our previous article in June.

Earnings continuity is the most important single factor when analyzing earnings quality

When examining the earnings of investment service companies, attention should be paid to the quality of the earnings. The key variable in terms of the quality of the earnings is its continuity. The more the earnings are based on recurring fees, the more predictable and valuable they are. At this point, it is worth noting that companies treat recurring fees differently in their own calculations, and our estimates may differ from the companies' accounting methods. We have classified non-recurring fees to include, e.g., fees from brokerage operations, structured investments, performance fees, insurance wrappers, and advisory services (such as corporate finance). Naturally, there can be significant qualitative differences in these items, and for example, the sale of structured products is, in our opinion, more continuous than an occasional performance fee from a single fund.

In recent years, the share of recurring fees of the companies we monitor has been, on average, around 70%. However, the range is very wide (2024: 33-89%) and reflects the different product/service mixes of the companies. In practice, the strategy of virtually all companies has for some time been to increase the share of recurring fees precisely because of their better predictability. However, investment service companies typically include various performance-based success fees in their products, and almost all companies also have individual product lines that we interpret as non-recurring (e.g., structured products, brokerage, or investment banking). Therefore, in normal circumstances, we believe that a good level for recurring fees can roughly be considered to be +80%. Of course, we do not find a 100% level a good thing, as it indicates the absence of performance fees and other non-recurring fees. By comparison, the share of recurring fees in the 2021 market bubble was 61%, which is explained by the frenzied performance fees across the board in 2021.

Another significant factor influencing the quality of earnings is the proportion of alternative investment products in fees, as these are significantly more predictable than products tied to traditional capital markets. Naturally, there are also major differences in traditional asset management, as the volatility of interest rate and equity funds differs from each other. The third key factor affecting the quality of earnings is the diversification of income flows at the customer and product level. The fewer customers and products from which fees are derived, the greater the risk associated with their development. The last factor affecting the quality of earnings is the flexibility of the cost structure. In general, the cost structures of the companies in the sector are quite fixed and they scale with strong levers in both directions. The largest fluctuating component in the cost structure is bonus costs, the significance of which varies greatly between companies. 

Significant company-specific differences

Finally, we have examined the quality of the companies' earnings on a company-specific basis, as measuring the quality of earnings is ultimately very subjective, and high-level comparisons with peers can, at best, only serve as a guide.

Among the companies we monitor, Alexandria's earnings focus relies most heavily on non-recurring fees due to the high weight of structured products. We believe that investors should note that even though structured products are non-recurring, Alexandria has been able to sell them fairly evenly regardless of the stock market cycle. In addition, the company has virtually no performance fees. In this sense, the very low share of recurring fees presented above gives an overly bleak picture of the predictability of the company's fees. Overall, however, the quality of earnings is moderate at best, and for Alexandria, increasing recurring fees (funds and asset management) is crucial in the coming years.

CapMan’s fee flows are, in principle, of a very high quality, as the majority of fees are recurring fees from alternative funds. Product-specific diversification is also a clear plus. However, investment income currently accounts for a very high share of the company's earnings, and profitability based on recurring fees is very modest. We find the quality of earnings weak, and the focus of the company’s strategy at the moment is to increase earnings based on recurring fees. Success in this is also a key driver of the stock price.

The quality of Titanium's earnings has improved clearly in recent years, as the share of recurring fees has continued to grow and the relative share of non-recurring fees has collapsed. In practice, the company’s fees derive completely from alternative products, which clearly supports the quality of earnings. However, the company’s fees still mainly come from the Hoivarahasto fund, in addition to which, there is very limited flexibility in the cost structure. Overall, the quality of Titanium's earnings is, at best, moderate.We consider the quality of Evli’s earnings good. The high share of recurring fees is a definite plus, and in addition, several items we classify as non-recurring (e.g., brokerage) are relatively predictable on an annual basis. The share of performance fees in the result is also quite small, and revenue streams are very widely diversified. The weakness in Evli's earnings quality stems from its dependence on traditional asset management. Although Evli has invested heavily in alternative investments in recent years, traditional asset management still accounts for a dominant share of its fees, and the company is exposed to capital market movements. In addition, the company's cost structure is relatively fixed, meaning that when revenue decreases, the cost level has limited downward flexibility.

The quality of eQ’s earnings is also good. The share of recurring fees is at an excellent level, and a majority of fees come from alternative products. The company's cost structure is highly efficient, and bonus provisions play a significant role. Thus, when revenue decreases, the cost level also decreases well on a sector scale. A key challenge in the quality of eQ’s earnings is its dependence on individual products. This has been reflected in the company's earnings development in recent years, as problems with real estate funds have significantly impacted the company.

Taaleri’s earnings are currently heavily reliant on Garantia’s investment income, performance fees, and non-recurring fees from its own balance sheet investments. We note, however, that Garantia's investment portfolio consists largely of interest-bearing instruments, and thus its predictability on an annual basis is reasonably good. The profitability of Renewable Energy has risen to a good level with the launch of the new SolarWind3 fund, which has improved the quality of the entire group's earnings. However, the quality of earnings remains modest, and improving it is at the heart of the company’s recent strategy.

United Bankers’ earnings development has been very strong in recent years, but the quality of earnings has left something to be desired. A significant portion of earnings growth has come from performance fees, and with the strong growth in performance fees, the share of recurring fees has remained at approximately 60%. Profitability adjusted for performance fees is also subdued. An increasing share of UB’s fees comes from alternative products, which has reduced the company’s sensitivity to the general capital market. However, overall, the quality of the company’s earnings is at most moderate.

Last year, only slightly over 40% of Mandatum’s earnings came from items we consider recurring, such as asset management fees and life insurance. Although the role of investment income from its own balance sheet is still significant for the group, the high weight of fixed income investments reduces earnings volatility.. In addition, the company has hedged against the impact of interest rate changes, so overall, Mandatum's investment income can be considered relatively predictable. The role of performance fees in asset management is also very small. Therefore, we consider the quality of Mandatum’s earnings to be reasonably good despite the high weight of investment income. The share of earnings based on recurring fees should also continue to grow as the company reduces its investment assets on the balance sheet while growing its asset management business.