Fitch: Volatility Adds to Challenges for Traditional Investment Managers
While weakened investment performance over the last six months adds to longer-term challenges for the industry including the shift to passive investment strategies and reduced secondary market liquidity for some asset classes, Fitch continues to believe IM ratings remain supported by AUM diversity by product and geography, low leverage and strong margins as a result of scale benefits and variable cost structures.
"The immediate aftermath of the Brexit vote exacerbated asset price volatility for many asset classes, and while most of the largest U. S. traditional IMs are only moderately exposed to EMEA from an AUM perspective, uncertainty over EU passporting may lead to burdensome expenses from staff and office relocations," said Nathan Flanders, Managing Director, Fitch Ratings in New York.
Fitch-rated UK IMs Schroders plc (A+/Stable), Aberdeen Asset Management plc (A/Stable) and Man Strategic Holdings Limited (BBB+/Stable) are positioned to cope with the Brexit strain in the short term, but may be vulnerable in the long term if access to the EU single market were to be restricted. However, in Fitch's view, all rated UK IMs have sufficient scale and diversification in other EU countries to manage any EU single-market restrictions, but this could create added expenses.
"Brexit vote-related outflows have to date been limited to directly affected strategies including property and UK small/mid-cap funds; however, there is a risk that outflows could spread to other asset classes on additional market volatility," said Christian Kuendig, Senior Director, Fitch Ratings in London.
In addition to the market volatility from Brexit, central banks' resultant monetary actions alter some of the dynamics with respect to interest rate-sensitive AUM. Interest rates being lower for longer could reduce asset price sensitivity for longer duration fixed-income products in the near-term, but create more market volatility in the long term if interest rates ultimately move unexpectedly.
Investor appetite continues to shift toward passive fund products, and Fitch expects that the U. S. Department of Labor's recent fiduciary rule could contribute to further outflows from actively managed funds. However, active strategies still represent more than 65% of U. S AUM, and some equilibrium between active and passive strategies should ultimately be reached.