By Fitch Ratings Paris/London (Aymeric Poizot, Roger Schneider, Richard Woodrow)
In a new report, Fitch Ratings says that European asset managers need to strategically review their product offerings and re-shape their activities by strengthening their key areas of expertise, scaling down or outsourcing others areas, and expanding in neighbouring activities while investing in new areas.
Asset managers are facing a difficult environment. 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 internalising their asset management operations. These issues will be compounded over the coming months by other concerns, such as portfolios in the low yield environment being reallocated toward income generating and global assets, a real problem for managers focused on traditional domestic assets. Cross-border activity is also intensifying competition, with new entrants and less room for second-tier players.
“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.
Conversely, Fitch anticipates limited growth in core assets (domestic equity and government bonds). While investors will maintain a reasonable allocation to such assets, they will become more receptive to switching to passive strategies, or to managers with stronger track records, an active management style and diversifying profiles. Competition for such assets will be intense.
Key investment strategies will need critical mass and resources. Fitch expects 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.
Asset managers should not hesitate to expand into “neighbouring” activities, despite the resource and process adjustment this requires. For example, loan expertise may be expanded into high yield or equity into diversified income. Bank deleveraging and globalisation should also benefit the European asset management industry. However, developing new activities, for example in global equity or senior secured high yield, requires significant investments in terms of personnel and/or acquisitions. Managers unwilling or unable to commit in these areas now may find themselves in a less competitive situation in the near future.
There has been no growth in European assets under management (both funds and mandates) in the past five years, with assets unchanged at USD18trn. In the past three years, only 40% of managers experienced fund inflows and 75 to 80% of inflows concentrated with only the top ten houses across asset classes.