Weakness in financial markets weighed on investor sentiment, hurting flows, fee revenue and margins for top 20 European managers in the second half of 2022, according to a report from Moody's Investors Service.
The group's combined AUM fell 2% to €11.4 trillion ($12.2 trillion) in the six months ended Dec. 31. and was down 11% year-on-year due to weak performance of equity and bond markets held back by rising interest rates and high inflation.
Moody's said AUM recovered in the first quarter of 2023 as markets strengthened, but performance across asset classes has been mixed and volatile.
Despite signs of recovery, Moody's said in the report released Thursday that it expects the group to remain under pressure as the outlook for equity and fixed income valuations over the rest of the year remains uncertain.
Net flows were negative in the second half of last year, but turned positive in the first quarter of 2023 as equity markets strengthened and rising bond yields encouraged fresh investment in the asset class.
Moody's also said lower fee revenue eroded top European firms' profit margins in 2022.
"We expect some improvement in 2023, helped by a better market performance in the year to date," the report said.
Investors remain cautious as inflationary pressure creates uncertainty around monetary policy, which drives bond price volatility.
A gloomy economic environment is also weighing on equity markets, Moody's said. "We expect investor demand for private assets to remain robust, although this could change if recessionary pressures persist."
Managers will also continue to face profitability headwinds from rising regulatory costs, inflationary increases in payroll expenses and high technology investment costs.