When the current period of generally rising asset prices finally comes to an end and financial markets slump, traditional mutual fund managers could experience heightened pressure on their bottom lines, according to a new report from Fitch Ratings Inc.
“The increasing investor shift from active to passive fund management, slower [assets under management (AUM)] growth, investment performance volatility and an evolving regulatory landscape are among the factors that could pressure earnings for traditional investment managers in the coming quarters,” says Evgeny Konovalov, director at Fitch, in a statement.
AUM growth for traditional managers has been modest over the past couple of years. In fact, their AUM was down by about 2% in 2015 before rising again by 3% in 2016.
“The global equity market recovery, which began in [the third quarter of 2016] supported more recent AUM growth, but elevated valuations and the potential for interest rate hikes in the U.S. may contribute to future volatility, particularly for those with outsized exposure to fixed income,” the Fitch report says.
In addition, the well-documented shift to passive strategies has added competitive pressure to active managers, the Fitch report says, and this has been further exacerbated by regulatory changes.
“To combat competitive pressures, many active managers have adjusted fees and may seek to diversify their product offerings into higher-yielding products, such as liquid alternatives, or into lower-cost active solutions, such as smart beta or other quantitative and robotic strategies,” the Fitch report says, adding that this pressure could lead to further industry consolidation.