Global Traditional Investment Managers Experience Mixed Fortunes

Global traditional investment managers (IMs) are experiencing mixed fortunes in the challenging operating environment, with the type of client having a key effect, Fitch Ratings says following a sector ratings review. IMs with diversified product offerings and a greater focus on more stable institutional clients or sticky wealth management clients are generally benefiting from net inflows, while those with a predominantly mass retail client base are more prone to net outflows due to customer risk aversion in uncertain financial markets.

itch-rated traditional IMs domiciled in western Europe and the US were all affected by a negative market impact on their assets under management (AUM) in 2022 due to declines in bond and equity markets driven by geopolitical and macroeconomic risks, followed in most cases by a moderate rebound in 1H23. However, the net new money impact on AUM has been more varied.

IMs with a mass retail focus, such as Jupiter and Anima, have generally seen weaker net flows from these channels, while IMs that target institutional and high-net-worth clients have generally fared better, particularly where they offer investment strategies that have been in demand. These strategies include passive investments and private asset strategies, such as those offered by Man Group, Schroders, Invesco and Amundi. We expect fixed-income IM franchises to attract higher inflows once interest rates stabilise. Some money market funds, such as those of Allspring, have already started to see higher inflows due to higher yields. However, their ability to retain and convert these into longer-term assets remains key for franchise resilience.

Profitability has remained robust, with (F)EBITDA margins still mostly above 20% despite the negative impact on AUM-related fees due to the market declines in 2022. This is largely thanks to the IMs’ flexible cost bases with largely variable distribution and compensation costs. But fees remain under pressure due to competition, regulations, such as the UK’s consumer duty rules, and value for money assessments requiring IMs to show that their prices are fair to customers. In a continued competitive environment and with the further growth of passive offerings, cost discipline will remain important to limit margin attrition.

The Fitch-rated IMs do not employ significant cash flow leverage as they are fee-generating businesses with limited balance-sheet usage other than for seed investments or co-investments in the case of IMs with private assets businesses. IMs with banking licences, such as Amundi and Schroders, make greater use of their balance sheet, with Amundi offering significant amounts of structured products and Schroders offering banking products to wealth management clients. However, the risks are well-managed, with Amundi’s only external debt being guaranteed by its parent Crédit Agricole, and Schroders having no corporate debt.

Elsewhere, debt incurred for M&A purposes is within rating tolerance levels, although cash flow leverage is sensitive to weaker (F)EBITDA generation, which could narrow rating headroom, notably for Allspring.

Fitch Ratings-London/Frankfurt-20 September 2023: Global traditional investment managers (IMs) are experiencing mixed fortunes in the challenging operating environment, with the type of client having a key effect, Fitch Ratings says following a sector ratings review. IMs with diversified product offerings and a greater focus on more stable institutional clients or sticky wealth management clients are generally benefiting from net inflows, while those with a predominantly mass retail client base are more prone to net outflows due to customer risk aversion in uncertain financial markets.

Fitch-rated traditional IMs domiciled in western Europe and the US were all affected by a negative market impact on their assets under management (AUM) in 2022 due to declines in bond and equity markets driven by geopolitical and macroeconomic risks, followed in most cases by a moderate rebound in 1H23. However, the net new money impact on AUM has been more varied.

IMs with a mass retail focus, such as Jupiter and Anima, have generally seen weaker net flows from these channels, while IMs that target institutional and high-net-worth clients have generally fared better, particularly where they offer investment strategies that have been in demand. These strategies include passive investments and private asset strategies, such as those offered by Man Group, Schroders, Invesco and Amundi. We expect fixed-income IM franchises to attract higher inflows once interest rates stabilise. Some money market funds, such as those of Allspring, have already started to see higher inflows due to higher yields. However, their ability to retain and convert these into longer-term assets remains key for franchise resilience.

Profitability has remained robust, with (F)EBITDA margins still mostly above 20% despite the negative impact on AUM-related fees due to the market declines in 2022. This is largely thanks to the IMs’ flexible cost bases with largely variable distribution and compensation costs. But fees remain under pressure due to competition, regulations, such as the UK’s consumer duty rules, and value for money assessments requiring IMs to show that their prices are fair to customers. In a continued competitive environment and with the further growth of passive offerings, cost discipline will remain important to limit margin attrition.

The Fitch-rated IMs do not employ significant cash flow leverage as they are fee-generating businesses with limited balance-sheet usage other than for seed investments or co-investments in the case of IMs with private assets businesses. IMs with banking licences, such as Amundi and Schroders, make greater use of their balance sheet, with Amundi offering significant amounts of structured products and Schroders offering banking products to wealth management clients. However, the risks are well-managed, with Amundi’s only external debt being guaranteed by its parent Crédit Agricole, and Schroders having no corporate debt.

Elsewhere, debt incurred for M&A purposes is within rating tolerance levels, although cash flow leverage is sensitive to weaker (F)EBITDA generation, which could narrow rating headroom, notably for Allspring.
Fitch reviewed the ratings of nine traditional IMs in its recent sector review: France-based Amundi, Italy-based Anima, Azimut and Banca Mediolanum, UK-based Man Group, Jupiter and Schroders, and US-based Allspring Buyer and Invesco. The review did not lead to any rating changes, although Anima’s Outlook was revised to Positive from Stable.
Source: Fitch Ratings