The U.S. investment management business is likely to see competition intensify as banks ramp up their efforts in this sector, according to a new report from Fitch Ratings.
The rating agency forecasts that competition in the traditional investment management industry will increase as banks “increase their focus on the low cost, high capital investment management segment,” it says.
Fitch says it believes this trend could result in smaller bolt-on acquisitions to expand product line-ups and/or add distribution capabilities. “Increased competition may further compress operating margins, as fees continue to tighten due to post-crisis performance challenges and general shift to low cost products and passive strategies,” it says.
While the prospect of rising interest rates is a potential risk to some fixed income investors, Fitch notes that overall operating margins have stabilized as most firms have significantly streamlined their operational expense base. Additionally, this creates positive operating leverage, it says, particularly for firms with equity market exposure, as asset allocations are expected to shift to equities.
The rating outlooks for traditional investment managers remains stable, Fitch says, “as investment performance issues have abated for the time being as global equity markets continue to rally.” However, it warns that “prolonged decline in equity and debt markets, sustained investment underperformance resulting in persistent outflows, aggressive acquisitions funded by increased debt levels and/or significant operational losses may result in negative rating pressure.”