Fitch Ratings has published a report suggesting a growing cyclical and secular threat to the profitability of asset management businesses, which are exposed to late-cycle risks and business models challenged by a shift in customer demand towards passive investment products.
Overall, its view on the AM sector remains "negative", although larger managers are seen as better placed to deal with the challenges and evolve and adapt, while smaller firms may be "absorbed by larger ones unless they can develop and maintain a niche market position".
"We expect the customer trend towards passively managed funds to continue," Fitch Ratings states.
"While traditional IMs argue the case for active management, emphasising that the rise of passive funds has been linked to rising markets, we believe that there are clear secular shifts towards lower-cost passive products. By April 2019, the total assets of passive US equity funds had reached parity with those of active US equity funds, according to Morningstar. To counter the trend, some IMs have started to focus more on private assets, which are less prone to replication by passives. However, changes to business models do not guarantee success, and come with execution risk."
"IMs' sensitivity to market factors was highlighted in 2018, after a decade of unrelenting asset price growth. Their performance suffered from declining asset values and net inflows due to investors' heightened risk aversion. Some of the largest traditional IMs experienced net outflows, and operating margins shrank as a result of reduced assets under management and lower fees. Furthermore, industry-wide fee compression continues unabated as IMs increasingly compete on price. Several IMs launched new low-fee charging structures in 2018."
"Despite the trend towards passive funds, active IMs may still be able to prosper provided they can maintain - or acquire - the scale and diversification to be cost-effective while offering customers an attractive product range that is distinct from passive funds."
Click here to view the full research report: Traditional Investment Managers: Industry Overview