Investment managers are increasingly focusing on expanding their private assets franchises and bolstering their wealth management to offset margin pressure and subdued net new money flows, according to a sector review by Fitch Ratings.
Fitch assessed eight traditional investment managers in its review: France-based Amundi; Italy-based Anima and Azimut; U.K.-based Man Group, Jupiter Asset Management and Schroders; and U.S.-based Allspring Buyer and Invesco.
The sector review found that fierce competition was driving down margins, particularly in the U.S. and U.K., where exchange-traded funds have become a mainstream alternative to higher-fee active investment management. ETFs accounted for 17% of all funds globally at the end of 2023, compared with less than 15% at the end of 2022.
Increased regulatory costs and complexity were also weighing on investment manager profitability, according to Fitch. For example, the U.K.’s Financial Conduct Authority's consumer duty and the European Commission's retail investment strategy were rolled out in 2023 to strengthen investor protection.
Traditional investment managers were also found to need to navigate global regulatory divergence on the suitability of sustainable funds and their labeling to avoid reputational damage and potential regulatory fines, for example the Sustainable Finance Disclosure Regulation in the European Union and Sustainability Disclosure Requirements in the U.K.
Investment managers were also found to be strategically expanding their private assets franchises, which benefit from locked-in capital and fees based on committed or invested capital, and bolstering their wealth management business, which has more stable net new money flows.
Managers including Amundi, Man Group and Azimut have recently made acquisitions to expand their private assets franchises. In July, Schroders announced it would be launching a new investment manager, focused on providing private assets investments to U.K. pension funds.
Despite the market challenges, investment managers continue to benefit from sound profitability, Fitch found, with fee-related earnings margins of at least 20% against a four-year average, supported by cost savings and relatively flexible cost bases.
