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Asset Managers Face ‘Fierce’ Competition as Passive Boom Outlives the Pandemic

Traditional stock and bond investment firms can weather the pressure with scale and caution with leverage, according to Fitch.

The popularity of passive strategies hasn’t died down during the pandemic — meaning European asset managers, like their U.S. counterparts, will need to brace for more pressure on their operating margins this year.

According to a new report from Fitch in London, the asset managers that the group rates, including Amundi, Azimut Holding, Man Group, and Schroders, among others, are in a position to weather the challenges, in part because they have strong brands, enough assets under management to be able to continue to invest in the business, and have used only a moderate amount of leverage.

Still, Fitch said they and other traditional managers around the world face pressure on margins “in 2021 and beyond due to fee compression driven by fierce competition.”

Fitch expects investors to continue to prefer low-cost index funds over active strategies. In aggregate, active managers have failed to prove their worth to investors by outperforming common benchmarks in 2020. For years, active managers have argued they would shine when volatility spiked, as their passive peers simply reflected the market’s fluctuations. But that didn’t happen last year, in part because the downturn was short-lived. The markets fell dramatically in March and early April, but then roared back when governments and central banks stepped in with trillions of dollars in stimulus. 

All Eyes Are on Active Managers

The performance of asset managers has been a mixed bag during the pandemic. Publicly traded traditional asset managers in the U.S., Canada, and continental Europe notched their strongest quarter ever between July and September 2020, according to Casey Quirk, the asset management strategy consultant that is part of Deloitte. Public managers hit new highs for both revenue and assets under management during the time period. But the consultant found that the difference between winning and laggard firms from a revenue growth and profit standpoint widened. The larger, more diversified firms got bigger, on the backs of strategic partnerships and trusted brands. 

In its new report, Fitch said it expects more mergers or acquisitions as managers look for scale. The asset management M&A market has been extremely active for a number of years as many firms look for popular strategies and new distribution channels.

Asset managers’ fortunes are closely tied to financial markets, primarily because the value of their investments decline. According to Fitch’s analysis, some managers have been able to offset those losses by attracting new money from clients looking to invest during the downturn.

Between the end 2019 and the end of the first quarter, Amundi’s assets fell 7.6 percent, primarily due to a drop in market value and a small percentage of outflows. Azimut’s assets fell 13 percent. The manager’s investment decline was offset by a gain of 1.7 percent in new fund flows. 

Schroders’ assets fell close to 6 percent. A 12 percent drop in the market value of its investments was helped by a 6 percent gain in new money.

Jupiter Was Hit by Both Market Declines and Redemptions

Jupiter was the worst performer, with an AUM decline of 18.2 percent, comprised of net outflows of 5.4 percent and a market hit of 12.9 percent. 

In a separate report, Fitch said Jupiter had net outflows of investors’ money in each of the last three years, as well as in the first quarter.

“These have been concentrated within a limited number of funds, in some cases relating to changes of fund manager, as opposed to being representative of Jupiter’s portfolio as a whole,” according to Fitch. The ratings agency said Jupiter is more vulnerable than other managers to “volatility in flows prompted by performance or personnel issues within any one fund, notwithstanding the expansion of its fund range following the acquisition of Merian.”

Everything improved in the second half of the year. Managers with large institutional client bases were the best performers, according to Fitch. But the average net inflow in the second half of 2020 was still below the average that asset managers brought in each year between 2015 and 2019.

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