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"Increasing market volatility, the continued search for yield in a low rate environment, divergent central bank actions and political spill over effects are among the factors that could pressure investment performance for IMs in the coming quarters," said Nathan Flanders, managing director, Fitch Ratings.

For traditional IMs, investment performance challenges could have a more immediate impact on financial performance given that the majority of managed funds are open-ended and assess fees on the basis of net asset value. However, this would be offset by generally lower leverage levels. Alternative IMs, by contrast, typically manage fixed (or permanent) life funds with fees assessed on the basis of committed capital, which would limit the initial impact on financial performance, which is an important mitigant given higher relative leverage levels.

After several years of strong AUM growth averaging 9% from 2012 - 2014, AUM growth has slowed and market volatility held AUM growth for traditional IMs to about 0% in 2015 and 2.5% in 1H16. The slowdown was driven both by weaker equity market performance and very modest client inflows (0.1% in 2015, 0.2% in 6M16). Going forward AUM growth could continue to be stressed. Increased investor preference for passively-managed investment strategies adds additional competitive and asset flow pressures to active-oriented traditional IMs, which could be further exacerbated by the U.S. Department of Labor's Fiduciary Rule and increasing regulatory scrutiny around fund pricing models in Europe.

To combat fee pressure, active managers are seeking to diversify their product offerings into higher-yielding products ranging from smart beta, to other quantitative-based strategies, to liquid alternatives. Fitch believes that there may be increased merger and acquisition activity in 2017 among active-oriented traditional managers, as evidenced by the recently-announced merger between Janus Capital Group and Henderson Group plc and the ongoing sale of Pioneer Investments, a UniCredit SpA subsidiary.

From a financial metric perspective, traditional IMs continue to exhibit strength, with average margins of 39%, average leverage of 1.3x and average interest coverage of 41x for the top 10 publicly-traded traditional IMs.

Alternative IMs have record uncalled committed capital (commonly referred to as dry powder) to deploy at a time when valuations are generally at elevated levels. Management fees could be under modest pressure for some in 2017, to the extent the deployment of dry powder is delayed by an absence of attractive investment opportunities and given the potential for further outflows in hedge fund strategies. But overall management fees are poised for growth across the sector in coming years given the continuation of strong fundraising trends and record amounts of shadow AUM (AUM not-yet-earning fees) to deploy.

Fitch expects generally-elevated leverage ratios to improve in 2017 for most alternative IMs, with incremental FEBITDA growth driven by cost controls, increased scale, continued fundraising, and the gradual deployment of capital. Should the amount of investment opportunities increase, fees generated from drawdown funds are likely to grow materially, which will help to reduce firm leverage ratios more meaningfully.

From a financial metric perspective, Fitch-rated alternative IMs continue to exhibit strength, with average margins of 33.6%, average leverage of 3.04x and average interest coverage of 8.06x.