Of the three aforementioned sectors, traditional asset managers are the “most exposed to market volatility, which we expect to weigh on credit metrics in 2023,” the report said. These pressures, S&P noted, may be “compounded by net outflows” for some traditional asset managers.
For traditional asset managers, liquidity risk exists for issuers with “sizable near-term debt maturities, significant variable-rate debt, or substantial quarterly interest payments,” the report added. Traditional asset managers also face continuing fee pressures for active managers “driven by growth of passive strategies, which have continued to gain market share.”
On the brighter side, the report noted that some traditional asset managers are growing their alternative offerings, “which could bolster AUM and provide visibility into earnings, if successful.” Also, traditional asset managers that are well-diversified by product and service offerings, investor base, and distribution channel, with large assets under management bases operating at scale, are “relatively better positioned” than their smaller peers with more “narrow offerings.”
While wealth managers are also vulnerable to market movements, their AUM base is “stickier,” S&P said, resulting in “more stable earnings.”
Of the three sectors, S&P said alternative asset managers are the “best positioned” for 2023, given the “locked-up nature” of their AUM base, “solid records of performance and fundraising, diversified platforms, and dry powder available to be deployed during market dislocation.”
S&P’s report noted that alternative managers have delivered “good investment returns, while average fund sizes have grown and platforms have broadened, including strong growth in private credit.” S&P expects demand for alternative investment products to “continue to grow, though the investment landscape remains competitive and institutional investors may be reaching their target allocations to certain alternative products.”
While alternative asset managers are less exposed to fee pressures, they may still see pressure on average fees “because of discounts to large investors,” the report warned.
Overall, despite the “challenging” macroeconomy, most asset managers in all three sectors remain “positioned to withstand continued volatility over the short term,” however there could be “further downside across the (whole asset management) sector if the market downturn is more severe or protracted than in our base-case scenario, with traditional managers most at risk,” the report said.
S&P also said European asset managers face “higher challenges” than their U.S. peers, as the ongoing crisis in Ukraine will add “energy uncertainty and market volatility” and the interest rate differential may make Europe less attractive than the U.S. for new investments.
Last year, in its report issued Jan. 14, 2022, the agency had assigned a “stable” outlook for all three asset management sectors.