In the face of increasingly intense competition and rising regulatory costs, asset managers are looking beyond their core businesses to bolster their bottom lines, finds Fitch Ratings.
Following a review of the traditional investment managers it covers, the rating agency said these firms are looking to expand their exposure to private asset segments and to boost their wealth management distribution channels in an effort to offset margin pressure and weak net flows into their core business.
While assets under management for these firms rose over the past 18 months, this was largely due to market appreciation, Fitch said. Net new flows, particularly from retail investors, were muted, “largely due to macroeconomic and geopolitical concerns.”
Fund managers’ margins are under growing pressure amid fierce competition and higher regulatory expenses. For example, tougher retail investor protection measures from regulators in both the U.K. and Europe have driven up costs, Fitch noted.
Fund managers also “need to navigate global regulatory divergence on the suitability of sustainable funds and their labelling to avoid reputational damage and potential regulatory fines,” the rating agency said.
At the same time, ETFs have gained increased traction as an alternative to higher-fee, actively managed funds, Fitch said.
“Competition from ETFs and from products offering more attractive yields due to higher interest rates, such as government bonds, money-market funds and savings deposits, has spurred traditional [fund managers] to bolster non-retail franchises, which are more insulated from the market challenges,” the rating agency said.
In particular, fund managers are “strategically expanding their private assets franchises, which benefit from locked-in capital and fees based on committed or invested capital, and bolstering their wealth management franchises, where [net] flows are less transient.”
A couple of the big firms recently made acquisitions to expand their private asset franchises, and another has promised to launch a venture focusing on private assets, Fitch noted. Additionally, firms are continuing their diversification into emerging markets with good growth potential, particularly China and India.
Despite the intensifying pressures, global fund managers continue to enjoy solid margins and sound profitability, bolstered by their variable cost structures, Fitch said.
From a credit perspective, these firms are generally solid too, with low leverage and reasonable debt levels.
Looking ahead, Fitch said it expects “margin pressure on core product offerings to continue, particularly for actively managed conventional funds. … The ability of traditional [fund managers] to offset margin pressure will largely depend on their success in expanding into higher-margin product lines and distribution channels.”