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Investment Managers Face Tough Investment Climate in 2023

Global investment managers (IMs) face macro pressures and a challenging investment environment in 2023, with traditional IMs more exposed than alternative IMs, Fitch Ratings says in a new report. Pressure on asset values, net flows and resulting management fees is likely to intensify due to increasing market volatility and slower economic growth.

Fitch’s 2023 sub-sector outlook for traditional IMs is ‘Deteriorating’ as we expect competitive pressures to increase as investable wealth diminishes and relative performance is tested. Traditional IMs with strong, diversified franchises and significant fee-earning assets under management are better placed to face the challenges, but smaller IMs may find their financial metrics under pressure unless they can deliver investment outperformance, for example through greater specialisation. Competition from passive funds, which have outperformed active funds (net of fees) in recent years, is also likely to continue.

Leverage for traditional IMs could rise from a low base given reduced earnings and increased acquisition activity due to lower valuation multiples. Liquidity could also deteriorate but near-term debt maturities are fairly modest.

Fitch expects regulators to focus on emerging investment risks in 2023, including higher-risk strategies that could lead to outsized investment losses or fund liquidity issues when markets are volatile. Fitch also expects regulators to continue their efforts to harmonise ESG definitions globally and to crack down on ‘greenwashing’.

Alternative IMs are likely to be more resilient than traditional IMs given the stability of their fees and long-term closed-end fund structures and growing perpetual capital structures. They also have a significant amount of available capital to deploy at more attractive valuations. Fitch’s 2023 sector outlook for alternative IMs is ‘Neutral’, in contrast to the sector outlook for traditional IMs.

Fitch’s 2023 sub-sector outlook for Canadian pension funds is also ‘Neutral’, reflecting their long-term investment focus, captive inflows and exceptionally strong asset overcollateralisation and liquidity.
Source: Fitch Ratings

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