4 May 2010
Fitch Ratings says in a new report that the European asset management industry is likely to remain under pressure during the remainder of 2010 and beyond, due to the need to restructure and because of financial market conditions.
Fitch does not foresee fund management industry profits returning to pre-crisis levels in the short term due to lower growth in assets under management and reduced cost saving opportunities. These factors will leave the financial standing of weaker asset management firms vulnerable to any renewed market downturn. Overall, the European asset management industry has seen profitability decline, although average operating margins remain healthy at 27%, compared with 35% in 2007.
Regulatory changes are also creating further uncertainty for the industry. On the investment management side, the implementation of the UCITS IV framework in 2011 should improve the efficiency of the industry and foster greater cross-border competition. By contrast, the Alternative Investment Fund Management directive, which is still being formulated, is viewed as more of a challenge by some investment managers. The initial effects of this changing landscape are already evident, however, through the launch of alternative UCITS vehicles and the relocation of offshore funds in European domiciliation.
The industry will also face further challenges in the shorter-term, particularly as ongoing uncertainties surrounding macro-economic trends will likely weigh on asset performance and inflows in 2010. In addition, the restructuring of business models is still a work in progress, with many product ranges still to be streamlined to achieve critical mass in core markets. However, some market segments - structured credit, funds of hedge funds, and specialised equity - are postponing such changes in the hope of a market rebound. Furthermore, shareholders of asset managers are less committed than pre-crisis, as they reconsider their portfolios, and revise the growth prospects of their asset management affiliates.
Nevertheless, amid less directional and more volatile markets, opportunities exist for managers who are able to exploit changing market trends through active asset allocation and relative value strategies in the short term. New opportunities will also be presented by changing demographic trends and new market growth through genuine product innovation in the longer term.
The European asset management industry experienced a cyclical recovery in 2009, as AuM in investment funds grew by 15.6% to EUR7.0trn, following a sharp retreat in 2008 when AuM declined 23.0%. Although net inflows recovered to over EUR175bn in 2009 on the back of stimulating economic conditions created by central banks and governments, risk appetite appears opportunistic and AuM growth has been primarily driven by positive market performance (80%).
Fitch does not foresee fund management industry profits returning to pre-crisis levels in the short term due to lower growth in assets under management and reduced cost saving opportunities. These factors will leave the financial standing of weaker asset management firms vulnerable to any renewed market downturn. Overall, the European asset management industry has seen profitability decline, although average operating margins remain healthy at 27%, compared with 35% in 2007.
Regulatory changes are also creating further uncertainty for the industry. On the investment management side, the implementation of the UCITS IV framework in 2011 should improve the efficiency of the industry and foster greater cross-border competition. By contrast, the Alternative Investment Fund Management directive, which is still being formulated, is viewed as more of a challenge by some investment managers. The initial effects of this changing landscape are already evident, however, through the launch of alternative UCITS vehicles and the relocation of offshore funds in European domiciliation.
"Longer-term changes, including regulations such as Basle 3 or Solvency 2, represent a more significant challenge to the industry which could see big investors like banks, insurance companies and pension funds moving outside certain higher risk asset classes," says Aymeric Poizot, Head of Fitch's Fund and Asset Manager Rating group in EMEA. "In this context, demand is more likely to focus on fixed income such as government bonds and riskier alternative products at the expense of equities."
The industry will also face further challenges in the shorter-term, particularly as ongoing uncertainties surrounding macro-economic trends will likely weigh on asset performance and inflows in 2010. In addition, the restructuring of business models is still a work in progress, with many product ranges still to be streamlined to achieve critical mass in core markets. However, some market segments - structured credit, funds of hedge funds, and specialised equity - are postponing such changes in the hope of a market rebound. Furthermore, shareholders of asset managers are less committed than pre-crisis, as they reconsider their portfolios, and revise the growth prospects of their asset management affiliates.
Nevertheless, amid less directional and more volatile markets, opportunities exist for managers who are able to exploit changing market trends through active asset allocation and relative value strategies in the short term. New opportunities will also be presented by changing demographic trends and new market growth through genuine product innovation in the longer term.
The European asset management industry experienced a cyclical recovery in 2009, as AuM in investment funds grew by 15.6% to EUR7.0trn, following a sharp retreat in 2008 when AuM declined 23.0%. Although net inflows recovered to over EUR175bn in 2009 on the back of stimulating economic conditions created by central banks and governments, risk appetite appears opportunistic and AuM growth has been primarily driven by positive market performance (80%).
