Fitch Ratings' 2015 rating and sector outlooks for investment managers are stable despite increasing competition between traditional and alternative investment managers to meet retail investors' growing appetite for alternative investments and secondary risks associated with a potential interest rate rise.
The outlooks, published in a special report by Fitch today, reflect the ongoing growth in assets under management (AUM), increasing AUM scale and diversity, consistently strong margins and healthy leverage and liquidity levels.
'Investment managers could face headwinds in 2015 if interest rates rise sharply or unexpectedly,' says Mohak Rao, Director, Financial Institutions. 'However, the low rate environment has also contributed to new trends, including increasing overlap between the traditional and alternative investment managers.'
Traditional investment managers with high proportions of fixed income assets could face asset outflows, reduced management fees, increased cash flow leverage metrics and potential reputational issues if a rise in interest rates leads to a sharp decline in asset prices. Higher rates could also challenge alternative investments if repayment capacity for borrowers in underlying funds and equity market valuations are pressured.
As the current low interest rate environment pushes retail investors toward alternative investment products in a search for yield, the line between traditional and alternative investment managers has blurred. Fitch believes partnerships may develop in this space as business areas begin to overlap.
Fitch believes traditional investment managers are currently better positioned to offer alternative investments to retail investors given their experience and scale in retail fund distribution, administration and reporting. Longer-term, however, success will hinge more on the balance between fund costs and product performance than manager type.
