June 7, 2017 / 8:27 PM / 2 months ago

Fitch Completes Traditional Investment Manager Global Peer Review

(The following statement was released by the rating agency) NEW YORK, June 07 (Fitch) Fitch Ratings has completed a global peer review of nine traditional investment managers (IMs). Based on this review, Fitch has affirmed the following Long-Term Issuer Default Ratings (IDR): --Aberdeen Asset Management PLC (AAM) at 'A'; --Amundi Group at 'A+' (AMU); --Azimut Holding S.p.A. (AZI) at 'BBB'; --FMR LLC (FMR) at 'A+'; --Invesco Ltd. (IVZ) at 'A-'; --Janus Henderson Group plc (JHG) at 'BBB'; --Man Strategic Holdings Limited (MAN) at 'BBB+'. --Russell Investments (Russell) at 'BB'; --Schroders Plc (Schroders) at 'A+'; Rating Outlooks were revised as follows: --The Outlook on IVZ was revised to Stable from Positive; --The Outlook on JHG was maintained at Positive; --The Outlook on Russell was maintained at Negative; --The Outlooks for the remaining traditional IMs are Stable. The rationale for today's rating actions includes both peer-group and company-specific considerations with the latter outlined in company-specific rating action commentaries also published today and available on Fitch's website. Rating drivers shared by the peer group include (to varying degrees) well-established and increasingly diversified franchises leading to scale and in some cases a degree of pricing power, adequate asset performance in a still challenging operating environment, broadly stable profitability despite margin and flow pressure from competition, most notably from passive strategies, increasing regulatory costs, and relatively strong cash flow leverage metrics, which remain below the peer group's long-term average. INCREASED COMPETITIVE PRESSURES DRIVE INDUSTRY CONSOLIDATION The underlying shift in investor preference toward passive investment management strategies continues to put significant competitive pressures on the active investment management industry, resulting in weaker client AUM flows (particularly in equities), fee compression and competition for distribution. Passive strategies garner significantly lower fees and delivered better results in recent years, as only about 17% of active equity strategies in the U.S. were able to outperform their commercial benchmarks over a 15-year horizon, according to the data by the Center for Research in Security Prices, University of Chicago. These pressures, together with increasing regulatory costs, have been drivers of increased merger and acquisition (M&A) activity among mid-tier active IMs. The recently formed JHG and announced merger between AAM and Standard Life are two examples of this trend. The acquisition of Pioneer Investments, a UniCredit S.p.A. subsidiary, by AMU also demonstrates industry consolidation, although the primary motivation for the transaction was the capital-raising needs of the seller. The acquisition of Source UK Services Limited (Source), an independent ETF provider, by IVZ reflects the firm's effort to improve its strategic positioning in the passive management space. While these M&A transactions help managers build scale, Fitch believes they also come with integration and execution risks, and are not likely to benefit client flows without strong relative investment performance. EVOLVING REGULATORY LANDSCAPE With new administrations taking office in the U.S. and France and the uncertain impact of Brexit in the U.K., there is a chance for diverging regulatory paths in the investment management industry, which creates uncertainty and compliance risks for the majority of global IMs. Historically, compared to their bank counterparts, traditional IMs have experienced less direct regulation. However, broader market regulation globally has led to increased disclosure/reporting requirements, scrutiny over pricing structures and requirements to adhere to clients' best-interest principles. The Dept. of Labor's (DOL) fiduciary (conflict of interest) rule in the U.S., which was originally scheduled to take effect on April 10, 2017, requires financial advisers to act in accordance with their clients' best interests. According to an announcement by the U.S. Secretary of Labor in May 2017, the requirement for partial compliance with the DOL rule is unlikely to be delayed beyond a June 9, 2017 implementation date, although there is a possibility for changes to be introduced. If the rule is implemented in its original form, Fitch believes it could further pressure fees on actively managed products and/or contribute to further growth of passive investment products, given the low-cost nature of the product, which tends to align with the DOL intention. That said, a portion of this impact has likely already been felt in the industry as most firms have made preparations to comply with the rule, given the uncertain implementation date. In Europe, some traditional IMs are subject to capital requirements under the EU's Capital Requirement Directive IV (CRD IV). In addition, regulators in the U.K. and the EU have expressed concerns about effective competition in the fund management industry, fund pricing structures and fee transparency. Under the Markets in Financial Instruments Directive (MIFID II), IMs will be required to improve disclosures of costs and charges in pricing documents, including the payments funds make to IMs for research. As a result, some IMs decided to partially or fully absorb research payments through their own income statements. STRONG MARKETS UNDERPIN AUM GROWTH, CLIENT FLOWS CHALLENGED A recovery in the global equity markets that started in 3Q16 supported AUM growth at rated institutions. For UK IMs, the sharp devaluation of the British pound also led to an increase in reported AUM. However, valuations being at all-time highs and rising interest rates in the U.S. expose AUM balances to a potential market correction. Additionally, despite strong longer-term investment performance, client flows remain challenged by weaker short-term results and competitive pressures from passive allocation. Further evidence that the recent shift of investor capital into passively managed strategies is more secular than cyclical may have negative rating implications or limit the potential upside for some of the rated IMs, particularly for those more exposed to U.S. equities, where that trend is more prevalent. MARGINS STAND STRONG, SUPPORTED BY FLEXIBLE COST BASES Traditional IMs have continued to generate strong operating margins despite increasing compliance costs and fee pressure from investor allocation to passively managed products, due to their scale, focus on growing AUM in the higher-yielding retail channel, and fairly variable cost structures. Average EBITDA margins for investment grade-rated traditional IMs ranged from 25%-51% for the peer group. Many firms have launched cost savings measures to improve operating efficiency to better withstand the environmental headwinds. Entities involved in M&A activity have the potential to realize cost-synergies and scale benefits, which should mitigate fee and flow pressure on margins. LIMITED USE OF LEVERAGE Debt usage has remained relatively modest for investment grade-rated traditional IMs and, in some instances, debt net of balance sheet cash is negative. Recent acquisitions have been funded by capital raises and existing cash reserves, with debt funding being moderate. Cash flow leverage levels, defined as gross debt to EBITDA, ranged between 0.3x and 1.3x for investment grade-rated entities, which was largely stable year-on-year. Performance turbulence may inflate cash leverage metrics, although Fitch does not expect modest leverage growth to impact ratings at this time. Positively, interest coverage metrics remains sound across the board, and the majority of sector borrowings are at fixed rates. Contact: Primary Analysts: Evgeny Konovalov (IVZ, JHG, Russell) Director +1-212-612-7839 Fitch Ratings Inc. 33 Whitehall Street New York, NY 10004 Christian Kuendig (Amundi, Azimut, Schroders) Senior Director +44 20 3530 1399 Michael Taiano (FMR) Director + 1-646 582 4956 Nalini Kaladeen (AAM, Man) Director + 44 20 3530 1806 Secondary Analysts: Arnau Autonell (AAM, Man) Associate Director +44 20 3530 1712 Evgeny Konovalov (FMR) Director +1-212-612-7839 Nalini Kaladeen (Amundi, Schroders) Director + 44 20 3530 1806 Jared Kirsch, CFA (IVZ, JHG, Russell) Associate Director +1 212 908 0332 Silvana Gandolfo (Azimut) Associate Director +44 20 3530 1301 Related Research: Traditional Investment Managers: Industry Overview (6 April 2017) Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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