Fitch Completes Traditional Investment Manager Global Peer Review

LONDON & NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has completed a global peer review of seven traditional investment managers (IMs). Based on this review, Fitch has affirmed the following Long-Term Issuer Default Ratings (IDR):

--Invesco Ltd. (IVZ) at 'A-';

--FMR LLC (FMR) at 'A+';

--Russell Investments (Russell) at 'BB';

--Aberdeen Asset Management PLC (AAM) at 'A';

--Amundi Group at 'A+' (AMU);

--Schroders Plc (Schroders) at 'A+';

--Man Strategic Holdings Limited (MAN) at 'BBB+'.

The Rating Outlook on IVZ was maintained at Positive, while the Rating Outlooks for the remaining traditional IMs are Stable.

Today's rating affirmations reflect the IM's strong franchises, diversity of assets under management (AUM), scale and performance track records of weathering potential performance headwinds, fee pressure and increasing passive allocations. Please refer to company-specific rating action commentary published today, and available on Fitch's website, for more information.

LESS FAVOURABLE OPERATING ENVIRONMENT

The current economic and business environment for traditional IMs is likely to result in moderate performance headwinds for IMs for the remainder of 2016. After an extended period of generally rising asset prices supporting AUM growth, markets have increasingly become subject to periods of volatility. Potential areas of future pressure include energy, emerging markets and high yield bonds/loans among others. Rising interest rates also remain a concern, particularly for traditional IMs with high exposure to fixed-income AUM. This cyclicality in traditional IMs' business models is a key rating constraint in Fitch's opinion.

Positively, traditional IMs continued to diversify their product base with the aim of achieving a more balanced AUM mix to moderate the effects of declines in individual asset classes. Investment grade-rated traditional IMs tend to be among the largest and most diversified IMs in the world leaving them better positioned than smaller peers to absorb likely periods of market volatility, evolving investor preferences and growing regulatory compliance costs.

Traditional IMs have also expressed concern about the potential for reduced secondary market liquidity for assets during periods of market stress, given the retrenchment of banks' balance sheets in the face of increased regulation. To date, traditional IMs have not added material liquidity to investment funds for fear the cash drag would lead to underperformance relative to benchmarks. Reduced liquidity could exacerbate fund underperformance during periods of heightened redemptions, driving AUM and fee declines, while also introducing potential reputational risks.

REGULATORY KNOCK-ON EFFECTS

Relative to their bank counterparts, traditional IMs have experienced less direct regulation. However, knock-on effects of broader market regulation include ongoing discussion around the systemic importance of traditional IMs and/or their largest funds, increased disclosure/reporting requirements and potential reductions of secondary market asset liquidity during periods of stress. European traditional IMs, including European subsidiaries of U.S. traditional IMs, have also become subject to minimum capital requirements. These dynamics continue to evolve but, at a minimum, introduce additional costs for traditional IMs and their fund investors.

WEAKENING INVESTMENT PERFORMANCE

Although most of the peer group has historically demonstrated strong net inflows and performance, including against benchmarks, investment performance became more mixed with most markets nearly flat over the last 12 months. Rising interest rates may also adversely affect investment performance going forward, primarily in fixed-income. With respect to fixed-income AUM, Fitch believes that rated managers exhibit active duration management, and diversified AUM by fixed-income asset class and geography, which may help moderate the impact of rising interest on fixed-income AUM. With the possibility of U.S. interest rates rising ahead of those in continental Europe, traditional IMs with fixed-income AUM concentrated in the U.S. would likely be impacted more immediately.

STRONG MARGINS; POSSIBLE PRESSURE AHEAD

Traditional IMs have continued to generate strong operating margins despite fee pressure from investor allocation to passively managed products, due to their scale and fairly variable cost structures. Average EBITDA margins for investment grade-rated traditional IMs ranged from 20% - 51% in the peer group; however, Fitch expects moderate pressure ahead, driven by abating AUM growth and weakening investment performance. Increased compliance costs could also pressure margins.

LIMITED USE OF LEVERAGE

Debt usage has been relatively modest for investment grade-rated traditional IMs, and in some instances the debt net of balance sheet cash is negative. Cash flow leverage levels, defined as gross debt to adjusted EBITDA ranged in between 0.3x and 2.9x for the investment grade-rated entities, remaining largely stable in the recent year. Some performance turbulence may result in slight increase in cash leverage metrics, although Fitch does not expect leverage growth to impact ratings at this time. Positively, interest coverage remains sound across the board, particularly in light of fixed interest rates on a majority of traditional IMs' borrowings.

Additional information is available on www.fitchratings.com

Related Research:

2016 Outlook: Investment Managers - Rated Managers Well-Positioned to Weather Headwinds - December 1, 2015

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160609006299/en/

Fitch Ratings
Primary Analysts:
Evgeny Konovalov (IVZ)
Director
+1-212-612-7839
Fitch Ratings Inc.
33 Whitehall Street
New York, NY 10004
or
Meghan Neenan (FMR)
Senior Director
+1-646-582-4903
or
Richard Wilusz (Russell)
Associate Director
+1-312-368-5459
or
Christian Kuendig (AAM, AMU, Schroders, MAN)
Senior Director
+44 20 3530 1399
or
Secondary analysts:
Evgeny Konovalov (FMR, Russell)
Director
+1-212-612-7839
or
Richard Wilusz (IVZ)
Associate Director
+1-312-368-5459
or
Arnau Autonell
Associate Director
+44 20 3530 1712
or
Media Relations
Hannah James, New York, +1-646-582-4947
[email protected]

Source: Fitch Ratings

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