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Alternative Market Briefing

Fitch's view on the investment management sector remains "negative"

Friday, August 16, 2019

Laxman Pai, Opalesque Asia:

A growing cyclical and secular threat to the profitability of global investment management industry, which is exposed to late-cycle risks and business models challenged by a shift in customer demand towards passive investment products, says Fitch Ratings.

Overall, Fitch Ratings' view on the global IM sector remains "negative", though larger managers are seen as better placed to deal with the challenges and evolve and adapt, while smaller firms may be "absorbed by larger ones unless they can develop and maintain a niche market position".

"We expect the customer trend towards passively managed funds to continue," said the report.

While traditional IMs argue the case for active management, emphasizing that the rise of passive funds has been linked to rising markets, Fitch believes that there are clear secular shifts towards lower-cost passive products.

By April 2019, the total assets of passive US equity funds had reached parity with those of active US equity funds, according to Morningstar.

To counter the trend, some IMs have started to focus more on private assets, which are less prone to replication by passives. However, changes to business models do not guarantee success, and come with execution risk.

IMs' sensitivity to market factors was highlighted in 2018, after a decade of unrelenting asset price growth. Their performance suffered from declining asset values and net inflows due to investors' heightened......................

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