Money managers' exposure to late-cycle risks combined with increased demand for passive funds has created a negative outlook for the industry in 2019, Fitch Ratings Inc. said in a report Thursday.
Smaller firms are at risk of being absorbed by larger ones unless they can develop a niche business, Fitch warned, as rising markets have helped boost passive funds' share of the money management market.
Active managers could be in a position to endure competition from passive funds provided they can maintain or increase scale and diversification, Fitch said.
Passive U.S. equity funds reached parity with active funds in April, which has forced money managers to add private assets to remain competitive, the ratings agency said.
Fitch also expects industry consolidation to continue as money managers pursue scale to protect margins, Fitch said. Acquisitions of complimentary businesses have been the main avenue for money managers to target higher yielding strategies as asset values declined in 2018.
Fitch forecasts that declining asset values will lead to outflows, and operating margins will shrink following a reduction last year in assets under management and lower fees, with more managers launching new low-fee charging structures.