Fitch Ratings-London-29 April 2022: Rated traditional investment managers (IMs) are well-placed to withstand near-term market challenges given their generally well-established and broad franchises, resilient profitability profiles and modest leverage, Fitch Ratings says following a sector ratings review. Western European- and US-domiciled traditional IMs have emerged from the pandemic with stable financial profiles, benefitting from market appreciation and robust net asset flows. But global inflation, macroeconomic uncertainty and increasing client risk aversion, exacerbated by the war in Ukraine, will weigh on fee-earning assets under management (AUM).
A key differentiating rating factor amongst traditional IMs is franchise scale and breadth. In a more volatile market environment, IMs with smaller, more concentrated franchises will be more exposed to AUM declines and reduced fee-earning capacity. Furthermore, IMs with a high proportion of retail clients and equity AUM are likely to fare worse as investors delay committing capital, or re-allocate to less volatile asset classes. IMs with higher proportions of more stable institutional mandates should be better positioned to withstand potential outflows.
The majority of rated IMs had good levels of net asset inflows in 2021, as markets stabilised and recovered from the pandemic-induced volatility. Larger, more established IMs are benefitting from consolidation of investment flows. IMs with alternative franchises, such as Man Group, or passive franchises, such as Amundi, are benefitting from investors’ search for higher yields, net of fees.
The modest cash flow leverage across the peer group is due to limited balance sheet usage, with higher leverage generally attributable to M&A transactions. Leverage can act as a constraint to ratings but can be mitigated by EBITDA-accretive acquisitions or cash retention, leading to lower net leverage.
Fitch does not expect leverage to significantly increase for the peer group unless related to M&A. Leverage could, however, modestly increase if declines in market value reduce fee generation, or to fund seed book expansion.
ESG is an increasingly important consideration for IMs, with the focus having spread globally from the initial European-centred focus. Sustainable fund assets have grown significantly in recent years, driven by strong demand, largely institutional, and by regulation to increase transparency. Sustainability definitions are becoming more harmonised and we expect that sustainable product offerings will remain a key competitive necessity.
In a peer review completed yesterday, Fitch reviewed the ratings of seven traditional IMs, resulting in two upgrades and five rating affirmations. Reviewed issuers were France-based Amundi (A+/Stable), Italy-based Azimut Holding S.p.A. (BBB/Stable) and Anima Holding S.p.A. (BBB-/Stable), UK-based Jupiter Fund Management PLC (BBB/Stable), Man Group Plc (BBB+/Stable) and Schroders plc (A+/Stable), and US-based Invesco Ltd. (A/Stable).