Fitch’s Sector Outlook: Deteriorating

Fitch Ratings’ 2024 sector outlook for global investment managers (IMs) is deteriorating. Increased macroeconomic and geopolitical risks and an increased risk of a US government shutdown create a challenging investment climate, with declining economic growth and high interest rates expected to pressure investment performance and increase market volatility.

Traditional IMs are more immediately exposed, as declining performance and net outflows reduce net asset value-based fees, while alternative IMs’ fees are more insulated given typical fee and fund structures. That said, higher rates are increasing market appetite for traditional and more liquid investments relative to alternative investments. Further pressuring alternative IMs are increased competition, particularly in private credit, still-muted fundraising and deal activity, sluggish realisations amid increased pressure to return capital, and fund performance that is likely to be challenged by macroeconomic conditions.

Fitch expects that competition amongst both traditional and alternative IMs will intensify, with greater variations in performance resulting in capital being consolidated amongst better-performing and more established IMs with proven through-the-cycle experience. IMs with diversified franchises, benefitting from more resilient and less correlated business lines, should also be better positioned to weather operating environment challenges.

We expect Canadian pension funds to be less affected by the challenging investment climate given their captive inflows, long-term investments, strong asset over-collateralisation, and ample liquidity.

Rating Outlook Distribution

Fitch-rated IMs are mainly investment-grade with stable business profiles as a result of wellestablished and robust franchises. Negative Outlooks generally reflect worsening leverage profiles, or smaller and less diversified IMs whose franchises are likely to be more vulnerable in the challenging operating climate.

What to Watch

• Increased geopolitical tensions catalysing wider market disruptions, adversely affecting investment performance and deal activity
• Expanding business lines to improve franchise resilience in the challenging investment climate
• Impact of high interest rates on relative investment performance, and effects on investors’ future asset allocations.
• Heightened regulatory scrutiny aimed at private fund managers, alternative IM/insurance company partnerships and continued focus on ESG

“Fitch expects IMs to be challenged in 2024 on the back of a tough investment climate, driven by continued macroeconomic uncertainty, and exacerbated by heightened geopolitical tensions. While the fee and fund structures of alternative IMs help to mitigate the effects of market downturns on fees, underlying investment performance could be pressured. We expect capital to be consolidated amongst top performers with proven through-the-cycle experience.” explains Nalini Kaladeen, Director, Fitch Ratings.