The 2024 sector outlook for global investment managers (IMs) is deteriorating, Fitch Ratings says in a new report. IMs face a tough investment climate due to increased macroeconomic and geopolitical risks, with slowing economic growth and high interest rates likely to pressure investment performance. Traditional IMs are more immediately exposed than alternative IMs given their reliance on net asset value-based fees, which are sensitive to declining performance and net outflows. Alternative IMs face less immediate pressure on fees but are likely to experience investment performance pressure due to depressed valuations and slowing realisations. Alternative IMs’ fundraising may also be challenged if investors modify asset allocations due to increased absolute returns on more liquid, traditional investment products. We expect competition to intensify in 2024. IMs with diversified franchises, benefitting from more resilient and less correlated business, will be better placed to weather operating environment challenges. IMs with excess cash or leverage capacity could look to bolster franchises with additional scale or diversification through bolt-on acquisitions. Product development will be an important theme in 2024. We expect traditional IMs to increase ESG focus, updating products in light of US and EU regulators’ focus on greenwashing. Alternative IMs will continue expansion into private credit as banks pull back due to capital constraints, but this will bring risks from rapid growth, competition and potential regulatory scrutiny. Canadian pension funds should be less affected by the challenging investment climate given captive inflows, long-term investments, strong asset over-collateralisation and ample liquidity. Over 80% of IM Rating Outlooks are Stable despite the deteriorating sector outlook. Fitch-rated IMs are mostly investment grade, with stable business profiles due to well-established, robust franchises. Negative Outlooks generally reflect worsening leverage, or smaller, less diversified IMs with more vulnerable franchises. Positive Outlooks generally reflect improving leverage profiles and more diversified assets under management. Source: Fitch Ratings

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