Research

The change reflects the industry’s success in adapting to product, cost and technology challenges, as well as rising demand in an expanding economy

By James Langton |

The global asset management industry is increasingly adapting to challenges facing the business, such as the move from active to passive strategies by investors, says Moody's Investors Service in a report published Thursday.

The rating agency has raised its outlook for global asset managers from negative to stable, citing the industry's progress at responding to issues such as evolving investor appetites, coupled with solid underlying economic growth.

The industry is developing new products that aim to meet investor demand by blending aspects of active and passive management, and by utilizing passive instruments within active disciplines.

"With greater focus on outcomes for investors, products are being designed to address risks across multiple asset classes. Products such as ‘smart beta' and multi-asset portfolios are designed to balance risk and return opportunities for investors," the report says.

The industry is also responding to the shifting environment with mergers and acquisitions designed to better position firms to meet investor demand. "Deals between large complementary organizations have fortified their market position. Acquisitions of products in either more defensible or more dynamic industry segments allow acquirers to adapt to change, with potentially less financial risk," the Moody's report says.

Additionally, as dealers increasingly employ fee for advice models and take more holistic approaches towards clients' wealth, "asset managers' distribution efforts are becoming more consultative and institutional in character," the report says. It notes that dealers are using technology to help capture the growth in robo-advice and to partner more closely with distributors.

"Fundamental challenges remain, however," says Neal Epstein, vice president at Moody's, in a statement. "Actively managed products that are most susceptible to passive substitution look increasingly redundant, and competition with cheaper passive products is driving fees lower across the industry."

Moreover, regulatory reforms that take effect in Europe in January will likely push investors to use lower cost funds, the Moody's report suggests.

However, "Competitive forces have not uniformly translated to financial stress. Fee models have become more adaptive, and cost initiatives have limited margin pressure," the report says.