Research by Fitch Ratings suggests that growth in Europe's asset management industry will be led by multi-asset, income and global products, as the industry continues down its path of concentration of assets to a relatively small number of players.
Research by Fitch Ratings suggests that growth in Europe’s asset management industry will be led by multi-asset, income and global products, as the industry continues down its path of concentration of assets to a relatively small number of players.
Aymeric Poizot (pictured), regional head EMEA FAM Group Fitch Ratings, said the industry is still suffering from a lack of structural growth, and that in practice management firms faced a situation of increasing competition from both within and outside Europe, as well as ongoing concentration of assets into a relatively small number of products and providers.
The challenge of finding suitable risk/reward ratios has continued to lead investors such as pension funds towards reallocation of assets. The key areas of asset management growth will come in investment solutions, credit, global products, multistrategy fixed income, low risk multi-asset and equity themes, he said.
So far, profitability remains in place on average across the industry, but it is not at all evenly distributed across all provider businesses. That means businesses that have already focused on risk management and operations now need to take the next step towards implementing serious strategic reviews, including the culling of non-profitable lines of products. There is little money available for a surge in M&A type activity, Poizot believes, in part because owners of smaller businesses are not happy with the prices they are being offered for their businesses. This leaves the option of building through specific products rather than buying other businesses outright
Poizot pointed to data that suggested Europe’s asset management industry may still not be recognising the size of its business challenge.
Fitch and Lipper data suggest that only 13% of cross border fund ranges are “well positioned” – this based on data for 233 ranges of more than 5 funds each. A further 27% “need focus”, while 60% of the ranges “need rationalisation” if they are to truly benefit from growth in cross-border distribution.
Meanwhile, Fitch, Mercer and Economist Intelligence Unit data points to a significant shift in allocation priorities among institutional investors.
Insurers representing some €5trn in assets are buying credit and raising cash levels, partly in response to Solvency II. Non-UK pension funds representing €1trn in assets are slightly increasing exposure to government bonds and credit, hedge funds and funds of hedge funds, and infrastructure, but are cutting allocation to property, equity and cash. UK pension funds, representing some €2trn in assets are also cutting equity exposure, while slightly increasing government bond, credit and infrastructure exposure. Taken together it represents a continuation of the theme that investors are still more willing to buy debt instead of shares in listed companies. And that in turn illustrates the business challenge faced, and the rationalisation pressures.
Manuel Arrive, senior director FAM Group at Fitch Ratings said that the ongoing environment had a particular affect on the way managers would look to make returns in different asset classes, such as equity, fixed income, multi-asset and absolute return respectively.
The focus in equities increasingly is on “quality and growth” stocks, but had to be done in light of the overbearing macroeconomic trends. Bottom up stockpicking alone is not enough at a time when the market generally may be pricing stocks irrespective of their fundamentals.
In fixed income, Arrive said there is a developing trend towards global and multi-strategy approaches. However, it was important to recognise the availability of liquidity could change sharply, requiring ongoing monitoring.
For those considering multi-asset strategies, it remained important to avoid “judgemental calls”, also known as market timing. This would not work.
And for those considering absolute return it would be important to recognise factors such as the higher statistical likelihood of negative returns in the current low yield environment. Instead greater diversification coupled with strict selling discipline and use of tools such as stop loss were called for.