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Fitch: Fund firm growth to reach ‘inflection point’

Fitch: Fund firm growth to reach ‘inflection point’

European asset management growth and revenue levels reached “inflection points” at the end of 2015 with both predicted to take a turn for the worse this year.

A report from Fitch Ratings said 2016 could see tempered growth in assets under management (AUM) due to dwindling returns and reduced inflows from retail investors and sovereign wealth funds.

Firms could see their high margins threatened by reduced AUM and revenue growth, and increasing investor scrutiny. This could lead fund houses to take on “bolder restructuring” in order to “protect margins” and increase “company resilience”.

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In the report, ‘European Asset Management Industry: Ripe for Change’, Fitch senior directors Manuel Arrive and Alastair Sewell said they expected the industry to grow below the 10 per cent seen in 2015.

Last year’s AUM growth was above the 9 per cent compounded annual growth seen since 2010, but came from performance over inflows, showing the pressure on firms’ revenue after a weak opening to 2016. Market and competitive factors would drive the figure and profit levels down in the future.

The report authors said: “2016 may mark an inflection point for industry growth. Fitch expects AUM growth to moderate, as a result of lower systematic market returns and decelerating inflows from sovereign wealth funds and retail investors.”

The duo added: “Deceleration in AUM growth will weigh on earnings growth in 2016. The revenue margins for European asset managers have declined since 2010 as a result of fee pressure and shifts to lower margin products and client mix. Regulatory, compliance and litigation costs have increased as have asset gathering and retention costs.”

However, the report said the suffering would not be balanced across the industry. Those offering multi-asset or alternative investment products could yet prevail.

“Flow dynamics vary widely by asset class and therefore do not affect asset managers evenly. Multi-capability players are less exposed to asset rotation risk than specialist players,” Fitch said, noting emerging market houses extreme perils in 2015.

Fitch said cross-border retail flagship funds would also continue to see “sustained inflows”.

“Most major asset classes recorded outflows [in Q1 2016], with significant redemptions from bond funds. By contrast, investors raised allocations to alternatives, in search of returns that are less affected by market cycles,” the report said.

Despite 2015’s figures, Fitch said the European industry’s growth was 1 percentage point below the US and 6 points below Asia.