Money managers operating in Europe might be forced to cut costs to sustain profitability, as they become increasing reliant on institutional hires rather than higher-fee-commanding mutual fund allocations, Fitch Ratings said.
Profits in the European money management industry returned to their pre-crisis peak in 2014, Fitch said in a news release Wednesday.
However, institutional allocations bring managers “significantly lower fee margins than retail mutual funds,” Fitch said in the release. “Strong inflows from offshore investors have helped delay the impact of this trend on overall profitability, but we still expect it to become more visible over the coming years.”
Those managers forced to cut costs could “materially dent an asset manager’s future prospects in an ever more institutional world.”
Managers’ credit ratings and money manager ratings — which are awarded by ratings agencies as an independent assessment of a money manager’s investment and operational platforms, relative to institutional investors’ standards — could also be affected, despite lower costs strengthening profitability and financial flexibility, Fitch said. Cost-cutting measures that affect a firm’s investment in controls, investment resources, middle- and back-office functions, and information technology resources could have an impact on the manager.
However, institutional hires are positive for money managers as they tend to be large in size and often remain with the same manager for a long period of time.