Research

The industry is facing intensifying competition, longer-term performance pressures and regulatory developments

By James Langton |

Intensifying competition, longer-term performance pressures and regulatory developments likely mean that more consolidation among U.S. traditional investment managers is likely, suggests a report published Thursday by Fitch Ratings.

According to the report, while the investment management business has recently enjoyed an easing of some of the pressure facing the industry — with asset outflows slowing and investment performance improving — Fitch Ratings still expects the motivation for consolidation to persist.

"Intensifying competition, longer-term performance pressures and regulatory developments likely mean that the M&A wave among U.S. traditional investment managers is not ending anytime soon," the report says.

The ongoing shift from active to passive assets is leading many active managers to "consolidate with other players in an effort to increase scale and defend competitive positioning," the report adds.

In the months ahead, the implementation of new regulations in Europe, known as the Markets in Financial Instruments Directive (MIFID II), will be another factor to keep an eye on, the report says.

Among other things, the new rules, which are slated to take effect on Jan. 3, 2018, will require the unbundling of investment research from trading commissions. This may create one more headwind for future earnings, the report suggests.

"Most investment managers are choosing to absorb this cost rather than pass it on to fund investors, which may exacerbate earnings pressure," said Evgeny Konovalov, director at Fitch Ratings, in a statement.