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The outlook for global asset-management firms in 2018 is a bit brighter than last year as there are signs the industry is adapting to the shift in investor appetite toward passive investments products, says a new report from Moody’s Investors Service Inc. published on Monday.

The credit-rating agency’s report notes that 2017 was a strong year for asset-management firms as strong markets powered growth in assets under management (AUM) and fees held up. However, net flows have been a weak spot.

“Throughout the year, asset managers benefited from rising equity markets and low volatility, which continued through the fourth quarter,” the report states. “Fees remained stable overall and, for the full year, revenue and [earnings before interest, taxes, depreciation and amortization] growth actually outpaced average AUM growth, partly as a result of strong fourth quarter performance fees. However, net flows, although an improvement over recent quarters, were barely positive, and certainly not at a level that will drive long-term growth.”

As a result, Moody’s says in the report that its outlook for global asset managers is stable compared to its negative outlook last year. “Our improved outlook reflects signs that the industry is adapting to the broad shift into passive products.”

In particular, the report observes that “Active managers are introducing new products, adapting distribution and better controlling expenses. In addition, active managers are increasingly using passive products as part of active strategies and are also diversifying into alternative asset management strategies.”

These efforts have led to improvements in net flows, yet they remain weak overall. In addition, the Moody’s report says that U.S. tax reform will benefit the sector, both by lowering the industry’s tax rates and increasing demand for asset management.

“Given these factors, we expect modest ratings activity in our asset-manager universe reflecting company-specific issues, without a pronounced bias up or down over the next 12-18 months,” the report says.