Moody's Investors Service has predicted a number of developments will take place across the asset management industry including further M&A, increasing ESG adoption and the closure of mutual funds.
The group, in its asset management outlook for 2019, gave the industry a "stable" rating due to the view fund houses can utilise technology to improve client experience, adapt their cost structures and use M&A to increase scale and diversification.
Moody's also forecasted asset managers' revenue growth would continue into 2019, but this would be moderate due to rising volatility causing reposition and outflows from funds, and further compression of fees.
"Tightening financial conditions will elevate volatility, credit spreads and term premia," the report said. "[This is] negative for the outlook if portfolio values and fee revenues decline."
Neal Epstein, senior credit officer and vice president at Moody's, added: "The several years of pressure on revenue margins has arisen from passive product substitution and competition in a crowded market."
In order to tackle these issues, Moody's predicted groups would adapt in a number of ways including using M&A to gain scale.
It said mergers would take place between large, complementary firms to gain scale and "fortify" market position.
Moody's gave the example of Invesco's acquisition of OppenheimerFunds from MassMutual for $5.7bn in October, which caused its AUM to rise to $1.2trn.
M&A, the note said, would enable firms to enhance their product capability and distribution through extending its geographical reach and moving into different asset classes.
Mutual fund closures
In the US, the top 2% of the 8,000 funds account for half of industry AUM, while nearly 2,800 have under $100m AUM.
Moody's said there is an oversupply of products with low active share and the winners will be the largest players who are able to maintain share through distribution and the strongest boutique performers.
In addition, the mutual fund vehicle is increasingly seen as "expensive and anachronistic".
In order to address this, Moody's recommended asset managers consider "wrapper diversification" through vehicles such as ETFs, separate accounts and collective trusts, and highlighted the opportunities for boutiques.
"Vehicle diversification creates opportunity for well-placed managers," the report said. "Regulatory initiatives and lawsuits compelling advisors to act in clients' best interest have driven the use of efficient, lower cost vehicles.
"Fee-based service model means product distribution efforts are more consultative and institutional in character," it continued. "The largest players will benefit; but strong boutiques can play here too."
In Europe especially, Moody's predicted regulatory pressures would continue to weigh on assets managers in 2019.
In particular, the areas that would see the most regulatory focus would be around the systemic risk of open-ended funds and ETFs, asset managers' ability to oversee technology risks, product governance, costs and disclosures and around sustainable investing.
"In Europe, MiFID II implementation is mostly complete," Moody's said. "[This has created] greater transparency in fees and charges pushing investors towards low-cost funds/ETFs."
Another trend, Moody's said, is the increasing demand for environmental, social and governance (ESG) products, especially in Europe, where ESG funds have grown 16% per annum since 2010.
The note added ESG brought differentiation to a product range and enabled firms to reduce risks, spot long-term opportunities and deliver returns in excess of average for risks assumed.
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