Moody’s Investors Service downgraded the global asset manager industry to a ‘negative’ from ‘stable’ rating for 2017.
The ratings agency blamed accelerating flows into low-fee and passive products, fee pressure across almost all industry segments, regulatory initiatives constraining sales and increasing costs, and high asset valuations and global macro divergences increasing tail risks.
“Active management performance after fees continues to underwhelm,” said Neal Epstein, Moody’s vice president and senior credit officer, in a report. “Investors are remaining cost-conscious as skepticism of active management’s value proposition increases.”
Furthermore, global regulation is adding to fee pressures, Moody’s said. The downgrade comes on the heels of the US Department of Labor’s new fiduciary rule that promotes fee transparency while reducing conflicts of interest, “thereby rooting out excessive fees,” the report continued.
“Relative performance and fee sensitivity are lessons that are being absorbed across the industry, and that’s a pressure that can build over time,” Epstein told CIO.
Moody’s further emphasized that low pension plan funding ratios and weak hedge fund performance contributed to fee pressures.
“The amount of effort it takes to try to build [hedge fund] portfolios and identify the managers has simply not kept up with the return, not to mention the cost of the product themselves,” Epstein said.
While some active managers have made efforts to overcome the difficult environment by expanding into smart beta, multi-assets, and alternatives, “organic growth remains a challenge for many active managers, while organic growth for passive managers outpaces the industry.”
Despite a negative outlook for next year, Moody’s said the asset management industry could return to a ‘stable’ rating through “improved active performance, moderation of rotation into passive products, stabilization of fee compression, cost structure adaptation, and stabilizing margins.”