Fitch: Investment Manager Outlook Stable Despite Challenges

The 2018 global sector and rating outlooks for investment managers (IMs) are stable, although longer-term industry challenges related to fee pressure, evolving investor preferences and high asset prices bear monitoring, says Fitch Ratings. The stable outlooks reflect solid franchises, low or improving cash flow leverage, good profit margins and solid liquidity profiles.

Traditional IMs face pressure from the regulatory focus on price transparency and investors' growing appetite for passive investment strategies, which generate lower fees. There could be added pressure in the event of a downturn in investment performance, which would be detrimental for asset flows and fees. High valuations across multiple asset classes, monetary policy normalisation and political uncertainty could be catalysts for a downturn in investment performance despite the more favourable investment environment for active managers in 2017 compared with previous years.

 

The EU's Markets in Financial Instruments Directive, which from January 2018 will introduce additional reporting costs and require IMs to either pay for investment research or to separately disclose these costs if passing them on to clients, is among the regulatory pressures. We believe this increased transparency for EU firms may lead to similar transparency from IMs globally, adding to competitive pressure.

Some traditional IMs have sought to offset fee pressure through acquisitions to increase scale and diversification, a theme we expect to continue. Recent mergers and acquisitions have been integrated without major problems and appear to be delivering their expected cost savings.

Fitch expects that alternative IMs will remain cautious regarding investment decisions, given the higher average entry multiples and competitive underwriting conditions in the markets. Pockets of dislocation exist in certain industries, asset classes and geographies, but many alternative IMs believe that it may be some time before a true distressed cycle emerges, which would allow for a more meaningful increase in capital deployment. Alternative investment management firms rated by Fitch generally have global reach, large scale and the ability to arrange co-investment capital and debt financing, and are therefore better placed to deploy capital when opportunities arise.

Most alternative IMs have leverage above their long-term averages but we expect this to reduce in 2018 as fee-related EBITDA rises, driven by growing scale, fundraising and the start of investment periods for several large flagship funds that earn fees on committed capital.

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