Faced with a difficult market environment, European asset managers need to review and refine their strategies, says Fitch Ratings in a new report.
The rating agency says that the European asset management business is grappling some fundamental challenges. It reports that there has been no growth in European assets under management for the past five years, with assets unchanged at US$18 trillion. In the past three years, only 40% of managers experienced fund inflows, and 75% to 80% of inflows were concentrated with only the top 10 players across asset classes.
And, the outlook doesn’t look particularly bright. “Disaffected investors are turning their backs on managed products, while the retail sector is shifting its focus to bank deposits and institutional investors are increasingly internalizing their asset management operations,” it notes. These issues will be exacerbated in the months ahead, it suggests, as firms face other challenges, such as investors shifting toward income-generating and global assets.
Fitch anticipates limited growth in core assets, such as domestic equity and government bonds. It also expects that investors will become more receptive to switching to passive strategies, or to managers with stronger track records, and says competition for these core assets will be intense. Additionally, it notes that cross-border activity is also intensifying competition.
As a result, it says that firms need to review their product offerings and refocus on their core strengths, while scaling back, or outsourcing, secondary activities.
“European asset managers will have to focus on the areas where they are credible, demand is sustained and performance expectations are high. In the next couple of years, investor demand will focus on income generation with credit or real assets, global products and moderate volatility products such as flexible multi-asset, fixed income multi-strategy or low volatility equity,” says Aymeric Poizot, managing director in Fitch’s fund and asset manager rating group.
Fitch says it expects asset managers to “undertake significant rationalisation, aimed at establishing representative flagship products that are in line with international standards. Conversely, investment strategies where demand is expected to be weak and/or the manager lacks credibility will be scaled down, either by closing funds, outsourcing management or by using funds of funds.”
And, it suggests that firms should be willing to expand into new areas that complement core strengths. “For example, loan expertise may be expanded into high yield or equity into diversified income,” it says. Although, it notes, that this sort of expansion is likely to be costly.