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Fund managers that are largely reliant on retail investors are more exposed to the challenges facing the industry amid elevated economic uncertainty and market volatility, says Fitch Ratings.

In a new report, the rating agency said traditional global investment managers have faced pressure on assets under management (AUM), with both equity and fixed-income markets declining in 2022 amid intensified macroeconomic and geopolitical risks before rebounding this year.

While the effects of the increasingly challenging operating environment on AUM are universal, new money flows have varied among firms, it said.

Firms with diversified product shelves and a greater focus on institutional clients or stickier high-net worth-clients “are generally benefiting from net inflows,” Fitch said. It added that this is particularly true for managers that offer investment strategies that have been in higher demand, including passive investments and private asset strategies.

Conversely, firms focused on a mass retail client base “are more prone to net outflows due to customer risk aversion in uncertain financial markets,” it said.

Once interest rates stabilize, fixed-income managers will attract higher inflows, Fitch said, adding that money market funds are seeing increased flows amid higher yields.

“However, their ability to retain and convert these into longer-term assets remains key for franchise resilience,” it said.

The report also noted that the sector’s margins and profits have remained strong despite the downward pressure on assets, primarily due to fund managers’ “flexible cost bases with largely variable distribution and compensation costs.”

This sort of cost discipline will remain critical to preserving margins, Fitch said, amid growing regulatory demands and continued industry competition, most notably from passive investments.