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Fitch: Traditional Investment Managers Face Financial Headwinds
April 6, 2017 / 3:21 PM / 8 months ago

Fitch: Traditional Investment Managers Face Financial Headwinds

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Traditional Investment Managers: Industry Overview here NEW YORK, April 06 (Fitch) Traditional investment managers (IMs) could experience modest financial performance pressure over the intermediate term, if and when the extended period of generally rising asset prices comes to an end, according to Fitch Ratings' Traditional Investment Managers Industry Overview report. "The increasing investor shift from active to passive fund management, slower AUM growth, investment performance volatility, and an evolving regulatory landscape are among the factors that could pressure earnings for traditional IMs in the coming quarters," said Evgeny Konovalov, Director, Fitch Ratings. AUM growth for Fitch-rated traditional IMs was down about 2% in 2015 and up 3% in 2016, compared with a strong 11% average for 2012-2014. The most recent slowdown was driven by equity market volatility and very modest client inflows (0.2% in 2015, 0.5% in 2016). The global equity market recovery which began in 3Q16 supported more recent AUM growth, but elevated valuations and the potential for interest rate hikes in the U.S. may contribute to future volatility, particularly for those with outsized exposure to fixed income. The structural shift in investor preference for passively managed investment strategies has added competitive pressure to active IMs, and has been further exacerbated by regulatory changes, including the potential introduction of the Department of Labor's Fiduciary Rule in the U.S. and increasing scrutiny of IM pricing practices for active products in Europe. In the U.S., actively managed funds experienced outflows of $315 billion in 2016, according to Morningstar, although active management still accounts for approximately 64% of U.S. long-term investment products. The delay or rescission of the DOL rule may ease the pressure to an extent for U.S.-based IMs, but is unlikely to reverse the current flow dynamics. To combat competitive pressures, many active managers have adjusted fees and may seek to diversify their product offerings into higher-yielding products, such as liquid alternatives, or into lower-cost active solutions, such as smart beta or other quantitative and robotic strategies. "Cost pressure for European investment managers could be further exacerbated if Brexit leads to a loss of a passporting rights within the EU, which could add additional costs for U.K.-based investment managers, as approximately 40% of assets managed by U.K. investment managers comes from overseas investors," said Christian Kuendig, Senior Director, Fitch Ratings. Industry consolidation, which could provide scale efficiencies, may be another competitive response from active managers, as evidenced by the recently announced mergers between Janus Capital Group and Henderson Group plc or between Aberdeen Asset Management and Standard Life, as well as the sale of Pioneer Investments, a UniCredit SpA subsidiary to Amundi. The majority of Fitch-rated traditional IMs have meaningful competitive advantages to navigate through industry and market challenges. Chief among these advantages are scale and diversification, which help firms weather periods of performance and/or asset flow pressure. Fitch-rated firms also have low cashflow leverage (averaging 1.3x at Dec, 31, 2016) and strong liquidity profiles, which should support relative rating stability over the near-term. Nevertheless, traditional IM businesses of all sizes remain inherently sensitive to financial markets and investor appetite, both of which introduce some degree of volatility in cash flows, operational leverage and fund performance. The full report is available at or by clicking on the link above. Contact: U.S. Evgeny Konovalov Director +1-212-612-7839 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Meghan Neenan, CFA Managing Director +1-212-908-9121 EMEA Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="">WWW.FITCHRATINGS.COM.. 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