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Fund managers might be having a hard time generating returns for investors, but their own profits are holding up, and their balance sheets are sound, says Fitch Ratings in a new report.

The credit quality of traditional fund managers is holding up well despite the tough investment environment, the rating agency said.

“Their credit profiles benefit from generally low leverage, sound profit margins, limited credit risk exposure and mostly resilient assets under management,” the report said.

As a result, Fitch affirmed its existing ratings on the traditional fund managers it currently rates, and the outlooks for most of their ratings are stable, it said.

“Rating headroom had decreased in some cases due to higher leverage following [mergers and acquisitions] activities, or because weaker net new money flows and investment performance could reduce [pre-tax profits] and increase cash-flow leverage,” it said.

While rising leverage can often lead to rating actions, most fund managers are starting with low leverage, it noted, adding that this represents “a rating strength and reflects their fee-generating business models and limited balance-sheet use.”

Additionally, the firms’ margins “should remain robust due to flexible cost bases with largely variable distribution and compensation costs,” it said.

The outlook for the global traditional fund manager sector is deteriorating, Fitch noted.

“This is largely due to increased macroeconomic and geopolitical risks, and the risk of a U.S. government shutdown. These factors make the investment climate more challenging, with declining economic growth and high interest rates likely to pressure investment performance,” it said.

Fitch also expects fund managers’ fees to “remain under pressure in 2024 due to strong competition and new fair-pricing regulation,” alongside their investment performance woes.