The U.S. asset management industry can expect another year of volatility and earnings pressure, says Moody’s Investors Service in a new report.
The rating agency says that asset managers remained resilient in 2011. “Firms controlled discretionary spending in the face of fluctuations in assets under management, fees and client flows, which helped support their margins, as did their conservative approach to liquidity and leverage management,” it says.
Nevertheless, Moody’s expects the year ahead to be another volatile one for asset managers, “with depressed global growth and economic uncertainty continuing to weigh on results”.
“Disappointing returns and relatively high fees on actively managed products are causing investors to reconsider their allocations,” says Moody’s vice president, Neal Epstein. “Well-diversified managers that can field alternative and passive products will have competitive advantages in the year ahead.”
The firm also published reports focusing on money market funds, closed-end funds and bond funds, maintaining a stable outlook on asset managers, money market funds and closed-end funds, but it has changed its outlook on bond funds to negative due to deteriorating fundamental credit conditions.
“Bond funds’ creditworthiness will come under pressure from the weakening macro environment and deteriorating sovereign and bank creditworthiness,” says Moody’s vice president, Vanessa Robert. “And prices are likely to remain volatile as a confluence of risk factors, including the changing economic outlook, political developments and deteriorating credit quality, causes swings in market sentiment.”
In 2011, bond funds benefited from another year of capital inflows and rising assets under management, Moody’s says. In 2012, assets under management are expected to remain solid, with continued investment in fixed-income investments amid global economic uncertainties and accommodative monetary policies, it adds.
For money market funds, Moody’s says they are also expected to face challenging conditions again in 2012, including credit and market risks, a shrinking supply of eligible securities, historically low interest rates and the prospect of regulatory reform that may transform the sector into a floating-NAV product and/or impose capital requirements.
“In 2012 high levels of liquidity, reduced exposure to European banks and increased investment in US government and Aaa-rated European government issues, as well as shorter maturities and active portfolio management should in most cases continue to mitigate money fund credit and market risks,” says senior vice president, Henry Shilling. However, he notes that these investment vehicles are not entirely insulated from rapidly changing market conditions.