Man on dollar cloud

The outlook for the global investment management business in the year ahead is deteriorating amid rising economic and geopolitical risks, says Fitch Ratings.

In a new report, the rating agency said the sector will face a tough investment climate in 2024, as slowing growth and tight financial conditions are expected to pressure returns.

Traditional asset managers are more exposed than alternative fund managers, Fitch said, given their reliance on fees driven by net asset values, which are tied to both market performance and net outflows.

Alternative managers are expected to see less pressure on their fees, but investment performance will likely also be challenged due to lower valuations and slowing exits, it said.

Additionally, alternative managers may see pressure on their ability to raise new capital “if investors modify asset allocations due to increased absolute returns on more liquid, traditional investment products,” Fitch said.

One segment that is expected to be less affected by the challenging investment environment is Canadian pension funds, which will continue to enjoy “captive inflows, long-term investments, strong asset over-collateralization and ample liquidity,” the report said.

At the same time, the rating agency also said that, with the pressure on investment performance rising, competition in the global investment manager sector is expected to intensify in 2024.

“[Fund managers] with diversified franchises, benefitting from more-resilient and less-correlated business, will be better placed to weather operating environment challenges,” it said.

There could also be consolidation in the sector, as firms with excess cash or borrowing capacity look to add scale or diversification through bolt-on acquisitions, the report noted.

In terms of product development, Fitch said it expects traditional fund managers to increase their focus on ESG themes, amid growing regulatory attention on greenwashing.

Alternative fund managers are expected to ramp up their exposure to private credit, as banks retreat from lending due to capital constraints, it added.

However, this move “will bring risks from rapid growth, competition and potential regulatory scrutiny,” it cautioned.

Despite the deteriorating outlook, over 80% of global fund managers’ credit rating outlooks are stable, Fitch noted.

Firms with negative outlooks “generally reflect worsening leverage or smaller, less diversified [fund managers] with more vulnerable franchises,” the report said while positive outlooks are typically reserved for firms with improving leverage and increasingly diversified assets under management.