The credit rating outlook for the global investment management sector has been upgraded to neutral by Fitch Ratings, which cited easing financial and economic conditions.
In a report released Tuesday, the rating agency said it revised its outlook for the sector up to ‘neutral’ from ‘deteriorating’ for 2025 due to the more supportive market environment heading into the new year.
“The 2025 outlook is underpinned by falling interest rates, slowing inflation, improving investment exit opportunities and a growing consensus that major developed economies will avoid a recession,” Fitch said.
For the sector overall, and particularly for traditional fund managers, the key risks include, “Geopolitical tensions, a potential resurgence of inflation, and market volatility,” it said.
Alternative managers are shielded from market risks to some extent by their fee and fund structures, which lock up assets and preserve ongoing fee income, Fitch noted. Meanwhile, the rating agency expects to see fee margins for traditional managers to continue to be squeezed, “driven by business mix changes and growth of lower-margin exchange-traded funds.”
In the face of these competitive pressures facing traditional fund managers, Fitch said it also expects to see increased industry consolidation and strategic partnerships as the size and scope of firms’ franchises “are increasingly important in protecting fee-earning assets under management and profitability.”
For the alternative investment sector, the long-term growth trends are generally positive, the report noted, “although competition remains intense given the wider array of market participants and product offerings.”
“Private credit remains a notable growth opportunity, as capital continues to move out of the banking system and insurers seek capital-efficient investment products. That said, loosening credit terms and increased complexity may negatively affect long-term performance. We also expect the continued penetration of the private wealth channel to drive long-term growth,” it said.
The credit outlook for Canadian pension funds is also neutral, Fitch said, with the sector’s “long-term investment focus, captive inflows and good visibility of outflows” supporting credit fundamentals in 2025.
“Financing markets are stabilizing amid declining interest rates and moderating inflation,” the rating agency said. “Alongside more favourable market sentiment, this has improved the macroeconomic environment. However, heightened geopolitical risks, slowing economic growth and increasing competition in sourcing private market assets could pressure pension fund investment performance.”
Fitch said it expects Canadian pension funds “to maintain generally steady allocations to private assets in 2025, with increased allocations to private credit and real estate credit compared with fully allocated exposures to private equity and infrastructure.”
Additionally, the report said it sees the regulatory environment for traditional fund managers as “fairly stable” heading into 2025.
“Financial regulation may loosen in the U.S. following the elections, but alternative [fund managers] are likely to attract scrutiny, with particular focus on valuation governance, liquidity in semi-liquid structures and tie-ups with regulated entities,” Fitch said.