The ratings agency has slashed its outlook for traditional active fund managers amid the rise of alternative forms of finance and investing such as robo-advice and ETFs.
The outlook for global asset managers has been downgraded from ‘stable’ to ‘negative’ due to the acceleration of flows into low-fee passive products from actively managed funds, and regulatory initiatives constraining sales, disrupting the global asset manager industry, according to Moody's Investors Service.
"Active management performance after fees continues to underwhelm," says Neal M. Epstein, a Moody's Vice President -- Senior Credit Officer. "Investors are remaining cost-conscious as scepticism of active management's value proposition increases."
The growth in passive ETFs has moved in tandem, and partly driven by the soaring demand for ‘robo-advice’ which tends to favour trackers in automated algorithm-driven strategies.
Global regulation has added to fee pressures as well, Moody’s notes. The US Department of Labor's new fiduciary standard promotes fee transparency while reducing conflicts of interest by ensuring advice is in consumers' best interest, thereby rooting out excessive fees. In the European Union, MiFID II also seeks to increase investor protection via regulatory oversight.
In the UK, the regulator the Financial Conduct Authority recently slammed active managers in a scathing review of the lack of outperformance of many funds against their benchmarks after fees.
"Active managers have become more dependent on market appreciation to drive assets under management (AUM) growth," Epstein says. "Organic growth remains a challenge for many active managers, while organic growth for passive managers outpaces the industry."
To adapt to this shifting environment, Moody’s says, the active industry is expanding efforts to develop products in areas such as smart beta, multi-asset, and global alternatives. Competitors are heightening efforts in M&A to increase scale and diversification.