Fund managers face asset, margin pressure

Despite facing growing pressure on both margins and assets under management (AUM), traditional asset managers are still well-positioned to weather these challenges, says Fitch Ratings.

In a new report, the rating agency said that most traditional fund managers held up relatively well during the pandemic due to strong markets and positive net asset flows.

However, they are now facing a growing array of headwinds. “Global inflation, macroeconomic uncertainty and increasing client risk aversion, exacerbated by the war in Ukraine, will weigh on fee-earning AUM,” it said.

At the same time, firms’ margins continue to shrink amid strong competition on fees and the ongoing shift from more-lucrative active to cheaper passive mandates.

Additionally, the report said firms with a higher proportion of retail clients, and higher exposure to equities assets, “are likely to fare worse as investors delay committing capital, or re-allocate to less volatile asset classes.”

Firms with more institutional mandates and lower equities exposure should see assets hold up better, but these firms also tend to have lower margins, the report noted.

Nevertheless, Fitch said its latest review of the sector found that traditional firms are still poised to face these rising threats, given their generally broad, well-established franchises, resilient profitability and modest leverage.

Firms have also been diversifying into alternative strategies, “which can command higher fee rates and do not face as much competition from passive products,” it noted.

“A key differentiating rating factor amongst traditional [fund managers] is franchise scale and breadth,” Fitch said. “In a more volatile market environment, investment managers with smaller, more concentrated franchises will be more exposed to AUM declines and reduced fee-earning capacity.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.