European asset managers to remain under pressure: Fitch

Date: Wednesday, May 5, 2010
Author: Investment Executive

The European asset management industry is likely to remain under pressure, due to financial market conditions, the need to restructure, and pending regulatory reforms, says Fitch Ratings in a special report released Tuesday.

Fitch says that it does not expect fund industry profits will return to pre-crisis levels in the short term because of slow 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,” it says.

The European asset management industry experienced a cyclical recovery in 2009, the rating agency reports, as AUM grew by 15.6%, following a sharp retreat in 2008 when AUM declined 23.0%. “Although net inflows recovered 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,” it says.

The industry will also face further challenges in the shorter-term, Fitch says, particularly as economic uncertainty will likely weigh on asset performance and inflows in 2010. Also, 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, it says. And, it points out that asset managers’ shareholders “are less committed than pre-crisis, as they reconsider their portfolios, and revise the growth prospects of their asset management affiliates.”

Additionally, regulatory changes are creating further uncertainty for the industry, it observes. While some changes are expected to improve the efficiency of the industry and foster greater cross-border competition, reforms being considered for the alternative investment industry, “is viewed as more of a challenge by some investment managers,” Fitch reports.

“Longer-term changes, including regulations such as Basel 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.”

That said, Fitch notes that opportunities exist for managers who are able to exploit the prevailing market conditions 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,” it concludes.