The largest money managers will benefit from benign market conditions in 2015, said an outlook report released Wednesday by Moody’s Investor Service.
“Scale is driving growth for the largest managers,” said Neal M. Epstein, a vice president and senior credit officer at Moody’s and co-author of the report, in an interview. “The ones with the largest distribution reach, the ones with the most capital and most able to innovate, will see a competitive advantage in 2015.”
The conditions that will serve the asset management industry in 2015 include the paradigm shift to passive strategies from active; the growing popularity of liquid alternatives funds, private equity and factor-indexed exchange-traded funds; and increasing regulatory oversight.
Moody’s report states that the growing distinction that investors make between active and passive strategies has caused managers to invest in new strategies that meet the demand for a widening palette of attributes, whether in alternative vehicles, multiasset formats or factor-oriented indexes.
Liquid alternatives funds, private equity and factor-indexed ETFs are other areas of rapid growth. Moody’s predicts net inflows of $49 billion to liquid alternatives funds in 2015 driven by institutional investors, which traditionally invest in illiquid hedge funds.
Strong returns are encouraging investors to commit more assets to private equity firms and institutional investors are now favoring smart-beta strategies over traditional, cap-weighted passive strategies, the report said.
“For institutional managers, there’s an increasing interest in hedge funds, in mixing passive and active products, in using non-traditional benchmark products,” Mr. Epstein added in the interview. “And the interest in these products is driving the accelerated growth for larger managers, because these larger managers have the means to develop these products.”
Regulatory oversight is also increasing across the financial services industry with greater focus on the asset management industry; money market funds are one example of strategies under pressure.
The largest managers are most competitively situated to address these challenges, according to Moody’s. Regulatory focus on risks of scale and concentration might result in new layers of oversight, including reporting and stress-test requirements.
The report said these market trends should support greater concentration of the asset management industry in 2015, especially where size enables managers to invest capital in new strategy development, interface with large distribution partners, enter new regions and address rising challenges from restrictive regulations
The report noted, however, that market disruptions or unexpected occurrences, such as key-man departures, strategy failures or regulatory hurdles, could weaken scale advantages.