The outlook for the asset management industry is now stable, after almost three years of being negative, as firms' significantly improved earnings capacity and their enhanced balance sheets have strengthened credit fundamentals overall.
Rating agency Moody’s has had a negative outlook on the asset management sector since April 2008 and only adjusted this to “stable” in March this year.
In its 2010 review of asset management and its 2011 outlook for the sector, the agency said that greater clarity around new regulations and the stability of the capital markets improved the environment in which asset managers operate.
Moody’s noted that in the fourth quarter of last year, aggregate quarterly earnings before interest, taxes, depreciation and amortization for Moody’s-rated asset managers surpassed the peak levels of Q4 2007.
“We expect asset managers’ earnings to continue to grow in 2011, albeit at a slower pace than in 4Q10, as managers begin to accrue more benefit from the rise in average assets under management of which equity assets account for a larger percentage of the underlying mix,” Moody’s said.
It also expected leverage ratios to continue improving in 2011 driven by higher levels of operating earnings. Moody’s said that the balance sheet strength of the asset managers it rates appears to be at or near an all-time high.
“We expect them to take a slightly more conservative approach to capital management in the post-crisis environment, with companies holding more cash on their balance sheets,” it said.
The agency was less confident about the potential impact of regulatory reform. Moody’s said: “As we enter 2011, asset managers are faced with a host of new regulations, but the impact of regulatory reform appears to be manageable in the near-term. That said, we continue to monitor a number of key areas, including the potential for regulatory changes related to: 1) money market funds; 2) annual fees; 3) fiduciary standard requirements; and 4) alternative asset managers.”
Although the overall outlook was a big leap from that issued a year ago, the sector continues to face headwinds that challenge growth and profitability in 2011 and beyond.
Moody’s noted: “The industry’s positive momentum will continue to be challenged by the sluggish macroeconomic recovery, weak organic growth and secular pricing pressures in addition to investors’ increased sensitivity to unexpected events following the financial crisis.”
The growth experienced by the financial services sector in the UK supports Moody’s more positive outlook. Consultancy PwC found that activity in the UK financial
services sector grew in the last three months at the fastest rate since June 2007. A survey the firm conducted revealed that profitability improved for the fifth quarter in a row and is expected to continue growing over the next three months.
“Buoyed by relative stability in the equity markets, growth in business volume and higher-than-expected fee income, investment managers are continuing their recent run of confidence,” said Pars Purewal, UK asset management leader at PwC. “Business with financial, personal and overseas investors has reportedly expanded and this growth is expected to continue through to the end of 2010 at least.”
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