Regulations and other pressures on portfolios run to supposedly beat a market mean the global asset management sector is being squeezed, prompting one of the international ratings agencies to fire a warning.

One of the “big three” global ratings agencies has cut its outlook on the world’s asset management sector to “negative”, arguing that a flood of money into low-fee passive products from more expensive actively managed portfolios and rising compliance burdens have taken a toll.

The outlook came from Moody’s in a paper entitled Asset Managers – Global: 2017 Outlook – Active Managers’ Struggles Persist.

“Active management performance after fees continues to underwhelm,” said Neal Epstein, a Moody’s vice president - senior credit officer. “Investors are remaining cost-conscious as scepticism of active management’s value proposition increases.” 

In recent years, there has been a surge in the use of passive products such as exchange traded funds, which typically charge fees far below those of actively managed portfolios. ETFs have gained ground for a variety of reasons, such as how regulatory crackdowns on use of trail commissions to advisors have encouraged advisors to use cheaper investment tools. Also, disillusion with results of actively managed funds, perceived as an inability to persistently create “alpha” over time, has hit some fund firms’ business models. The rise of the internet and new platforms has also intensified price competition between investment houses.

Regulatory developments have shaken up the funds sector. In the US, for example, the recent adoption by the Department of Labor of a new fiduciary standard, which forces wealth managers to be more transparent on fees and curb conflicts of interest, is seen by Moody’s as squeezing some fund managers. Similar regulatory moves are under way in Europe, such as with the MiFID II directive, and in Asia, with Singapore’s FAIR Act regulations around commissions and advisors. 

Such developments are also encouraging merger and acquisition activity and rapid growth for big “passive” houses such as BlackRock, the multi-trillion-dollar investment house (a major provider of ETFs), and Vanguard. These forces are also driving attempts to gain an edge through innovative investment ideas, such as “smart beta” ETFs (where investors can gain exposure to certain money management tactics and drivers of return).

“Active managers have become more dependent on market appreciation to drive assets under management growth,” Moody’s Epstein said. “Organic growth remains a challenge for many active managers, while organic growth for passive managers outpaces the industry.” 

There have been other warnings of pressures on the industry. For example, in July this year, Boston Consulting Group, a US-based consultancy, said the global value of assets under management rose by only 1 per cent last year, to $71.4 trillion, up from $70.5 trillion in 2014. This lack of growth was due to slow net flows and the generally negative and turbulent performance of global financial markets. New net flows - the lifeblood of the industry's growth – dipped slightly in 2015, it said. Overall profits remained relatively stable in 2015, but rose just 1 per cent to reach $100 billion. 

Profits as a percentage of revenues remained at a 37 per cent level, slightly below 2014, because of increased cost management by asset managers. Meanwhile, fee pressure on managers continued to rise, the BCG report said. 

As far as the ascent of the ETF market is concerned, see this report on comments by PricewaterhouseCoopers here.