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rotation supports fund sector outlook

Moody’s expects real GDP growth of 2.0% in the advanced G20 economies this year, up from 1.3% in 2013. This improvement in macroeconomic conditions will support capital markets and boost investor confidence, thereby stimulating growth in assets under management, the firm says.

In addition, market volatility associated with the tapering of US quantitative easing will be short-lived, Moody’s predicts, while accommodative policies will remain in place “through 2014”. As such, the rotation from fixed income to equities and alternatives that began last May is likely to persist.

“This trend supports the sector’s stable outlook by improving the aggregate fee yields of assets under management and increasing asset managers’ operating margins,” wrote Yaron Ernst, managing director of Moody’s Managed Investments Group.

“Among actively managed asset management products, equity and alternative products typically earn the highest fees, and with increasing revenues, margins should expand modestly.”

Improved earnings will additionally cause fund manager debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratios to fall. “In 2014, operating leverage is expected to boost EBITDA growth, supporting cash flow and balance sheet liquidity,” noted Ernst.

Other findings of the outlook:

  • Moody’s rates the outlook for money market funds as “stable”, despite the “wide-ranging regulatory changes” faced by the sector in the US and Europe;
  • Traditional asset managers will develop products designed to deliver attractive risk-adjusted returns at reasonable cost, in response to the rise of passive investment; and
  • Merger and acquisition activity will continue in 2014, as the increased costs of regulation motivate managers to sell assets and businesses, or merge to achieve greater scale.

tom@ybc.tv

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