EUROPE – Niche asset managers will benefit from institutional investors' growing appetite for alpha products and diversification this year, according to Moody's latest global asset management outlook.
The ratings agency said this would likely boost growth among alternative asset managers, adding that managers offering more traditional strategies were unlikely to attract large mandates.
Moody's report predicted "moderate" growth in the asset management industry due to low gains in equity markets, low interest rates and the gradual erosion of risk aversion.
However, it also noted that the financial crisis had encouraged investors to shift their focus towards low-cost beta and higher-fee alpha products and said this trend was likely to continue in the coming months.
Moody's stressed that investors' search for alpha and diversification would drive growth among alternative themes, where the long-term horizon of institutional investors allowed managers to extract the liquidity premium offered in private-market investments.
"Managers with niche expertise in areas such as senior and mezzanine bank loans, infrastructure equity and debt, as well as direct lending to small and medium-sized enterprises, are well positioned to benefit from the shift to alternatives," it said.
It added that, with current AUM levels starting from a relatively small base, and given higher fees on alternative investment products, successful firms would be able to improve their overall fee rates.
The agency nonetheless conceded that asset management firms unable to adapt to this dynamic would find it difficult to attract new investors.
Additionally and unlike alternative assets, demand for fixed income will remain stable, as return expectations will remain low, it said.
Moody's also noted that, on the equity market, a return to inflows in equity funds would be credit positive for asset managers, as the shift to fixed income had suppressed revenue yields and limited the effect that market gains had on asset managers' profitability.
Finally, Moody's warned against the regulatory frameworks put in place in Brussels and noted that 2013 – unlike 2012, which was spent preparing for new regulation – would see senior management teams faced with the challenge of implementation.
"The reality of complying with increased regulatory oversight and reporting requirements will result in higher operating costs and management distraction for asset management firms," Moody's said.
"Larger-scale managers, although likely subject to greater regulatory requirements, will have a competitive advantage relative to smaller peers given their greater flexibility to absorb the added compliance and infrastructure costs associated with regulations across a wider operational base."
