The Outlook for Asset Managers Is No Longer Negative, Moody’s Says

The credit rater cited rebounds in equity markets and investor risk appetite in upgrading its outlook to stable.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

As global asset management industry recovers from the Covid-19 pandemic, Moody’s has shifted its outlook for investment managers from negative to stable.

In its June 2021 global asset management report, the credit rating company revised its outlook on the asset management industry, attributing the change to the strong market rebound after March 2020, the recovery of organic growth rates, and the resulting recovery in investor risk appetite. The report, which was published Wednesday, also noted that, as a result of strong market performance, asset managers’s revenue and profit margins have recovered from the pandemic crash.

“The industry has been resilient through the pandemic,” Rory Callagy, associate managing director at Moody’s Investors Services and lead author of the study, said in an interview. “Private markets provided a lot of that support, but there are also positive trends in the operating fundamentals.”

In March 2020, extreme market volatility caused assets under management to fall. Moody’s analysts had expected this decline to send reverberations through the market for the rest of the year, but by the second quarter of 2020, the equity markets had “rebounded sharply,” the report said. Since then, AUM growth has recovered — and will likely continue to expand — as a result of stronger markets, higher fee performance, ETFs, sustainable investments, and private market strategies, the report said.

Private markets, in particular, “took a pause in 2020” amid fiscal uncertainty, but have since returned with strong flows across the industry, Callagy said. For instance, in the first quarter of 2021, the aggregate fundraising for the four largest publicly-traded alternative asset managers was $67.3 billion, a 22 percent increase from the same time last year, according to the report. Callagy said he partially credits low interest rates for the strong inflows into private markets.

“Interest rates, while they’ve come up a little bit, are still historically low, which creates challenges for investors that are trying to generate yield and return,” he said. “So we think that has been one of the factors that led to very strong inflows into private market strategies. And that’s lifting the outlook for alternative asset managers as well as traditional asset managers.”


Risk, Returns, and Revenue Rebound

With increased investor confidence comes a willingness to take on more risk. The report documents a “return of investor risk appetite,” noting that in the first quarter of 2021, long-term net outflows — for the group of asset managers Moody’s surveyed — reached 1 percent, the “strongest quarterly result over the past 12 months” and the “first time the surveyed group (excluding BlackRock) had positive net flows since Q4 2017,” according to the report. The authors expected the private market growth to continue into the outlook period.

With return generation remaining a challenge for institutions, investors will likely continue to rely on private markets, where returns are higher, according to Callagy. “This is positive for asset management companies — and the industry’s outlook overall — because the fees that managers charge on those strategies tend to be higher than what they’re charging on, say, traditional fixed income asset classes or other, safer asset classes, like money market funds. The combination of the flows and the higher fees is a positive for the revenues and earnings.”

Revenue and profit margins in the asset management industry also rebounded after March 2020 lows, according to the report. Following the strong market rebound, revenue and profit margins benefitted from the equity market rally, stronger fund flows, and investment performance, the report said.

“Higher revenue levels combined with the industry’s continued commitment to invest in operating efficiencies will provide support to industry margins over the outlook period,” Moody’s said.

Inflation Could Still Hurt Asset Managers

Inflation is a major risk to the outlook, which is based on the expectation that inflation will continue to rise and eventually settle at 2 percent. If, in the next 12 to 18 months, inflation “spirals out of control and impacts the returns of both equity and fixed income strategies,” Moody’s outlook for asset managers could shift from stable to negative, the report said.

Asset management may have recovered from the pandemic, but the extreme volatility associated with the crisis exposed and “intensified” many of the industry’s long-term problems. For instance, fee pressure, the shift to passive investing, shifting demographics, and the rising competition and associated costs in the industry continue to pose challenges for asset managers and investors, according to the report.

“During the pandemic, large, diversified asset managers with scale across all segments of their business were more resilient to economic and market shocks than smaller firms,” Moody’s said. “Given the growing premium on scale in the industry, we expect M&A volumes to remain high over the outlook period.”