EUROPE - European asset managers will have no option but to adapt to institutional investors' needs by pursuing new trading and structuring strategies instead of offering "standard" investment solutions, according to Fitch.
A recent study by the ratings agency found that disaffected investors were turning their back on managed products, and that institutional investors were increasingly internalising asset management operations.
Fitch said European asset managers therefore needed to review their product offerings and re-shape their activities by strengthening "key areas of expertise".
Aymeric Poizot, managing director in the agency's fund and asset manager rating group, told IPE that, at the moment, a large majority of asset managers simply offered 'investment solutions' strategies.
This, he said, was due to the fact the implementation of such strategies required low capital commitments and limited human resources.
But he argued that those solutions would no longer meet large institutional investors' requirements.
The Fitch report points out that, in the coming months, asset managers are likely to face "additional concerns", such as portfolios in the low-yield environment being reallocated towards income-generating and global assets, a real problem for managers focused on traditional domestic assets.
Cross-border activity is also increasing competition and putting pressure on second-tier players.
"European asset managers will have to focus on the areas where they are credible, demand is sustained and performance expectations are high," Poizot said.
"In the next couple of years, investor demand will focus on income generation with credit or real assets, global products and moderate volatility products such as flexible multi-asset, fixed income multi-strategy or low-volatility equity."
By contrast, Fitch predicts limited growth in core assets such as domestic equity and government bonds.
Although investors will maintain a "reasonable" allocation to such assets, they will become "more receptive" to switching to passive strategies or active managers with stronger track records, it said.
The report recommends that asset managers expand into "neighbouring" activities, despite the resources and changes this would entail.
"Asset managers will need to invest the necessary amounts of capital to have a trading capacity and an in-depth knowledge of transition management, so they have the capacity to re-allocate large portfolios," Poizot said.
"The real question is who among the asset management industry will be able to invest in the necessary human resources to make block trades at minimal costs, for instance."