“Traditional active management remains out of favor with investors and fee pressures have been accelerating in commodity type products. Especially in the US, larger banks and insurance companies will be formidable bidders for asset managers that can increase their own competitive edge,” he added.
Moody's has identified six key credit themes for the global asset management sector:
Uneven economic recovery
The strength of the economy will drive market performance. Although we project global economic growth for 2021, the level of output will not reach pre-pandemic GDP levels in most countries.
In the short term, the recovery path is beset by uncertainty and will remain highly dependent on the development and distribution of a vaccine, effective pandemic management and government policy support.
Elusive organic growth
Asset manager diversification is a key mitigant against intensified competition and changing investor preferences
Lackluster organic asset growth given demographics and the shift to decumulation intensifies competition and shifts flows to those able to generate alpha. Continued demand for passive and now conservative strategies reinforces the edge big companies have over smaller ones.
Gap between winners and losers is widening as new investor flows are concentrated in fewer players, Moody's said, adding, Specialized asset managers with differentiated investment capabilities and/or service offerings will continue to generate above average organic AUM growth.
Fee pressure & industry overcapacity to drive M&A
Deeper discounts to historical valuations, especially for US-based traditional asset managers, encourages consolidation activity.
According to Moody's, the industry is ripe for consolidation as it is fragmented with top 10 firms having 35 percent of global market share; oversupply of mutual funds in benchmarked disciplines.
M&As will be key to firms struggling to differentiate themselves. Deals will focus on scale, diversification, and strategic alliances that enhance distribution or open asset managers to foreign markets, Moody's said in the report.
The coronavirus crisis has intensified the challenges long faced by asset managers, justifying M&A to gain scale, access to new markets and distribution channels and the growth promised by favoured investment capabilities.
Lower for longer interest rate environment
Alternative, ESG and outcome-oriented solutions will drive future growth, Moody's said.
As central banks in most countries will ensure interest rates remain low, alternative strategies that promise higher yields will attract assets and drive industry revenue growth. Those with proven capabilities in ESG and solutions-oriented products have an opportunity to meet other investor needs, the report noted.
Areas that will attract asset flows over the next five years include alternatives, ESG, and under-penetrated global markets, it said.
Coronavirus crisis postmortem revealed increased systemic risk contribution of non-bank financial institutions.
There has been increased regulatory oversight of asset managers as a result, especially with respect to fund liquidity, leverage and value-for money.
Asset manager margins have been steady but the pandemic underscored/accelerated the need to make investment towards technology and data analytics that support distribution and client engagement.
Historically laggards in adopting technology, asset managers appreciate the need to enhance their offerings with digital functionality in hopes of gaining closer ties to end clients, the report said.
The sale of funds through online payment platforms which is very successful in China is more likely to be replicated by players in developed markets.
According to McKinsey, a growing number of companies have accelerated automation and digitization since the start of the pandemic. However, digital transformation raises cyber risk and will require increased cybers defenses, the report said.
(Writing by Seban Scaria; editing by Daniel Luiz)
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