Ratings firm says those with elevated leverage are also more vulnerable in volatile market conditions
Investment managers (IMs) with elevated leverage and outsized equity-orientated strategies face the most pressure to assets under management in the current market.
A new report from Fitch Ratings says that these firms are most at risk from increased volatility and global market sell-offs prompted by the coronavirus pandemic.
It says that while most traditional IMs will continue to generate positive cash flows under stress, there tends to be less flexibility for highly-leveraged firms, some of which have already seen ratings downgrades.
Traditional IM models allow for reduction of expenses in line with revenue declines, so as to maintain margins; they also have some flexibility in reducing current high payout ratios to preserve capital.
Most traditional IMs have some cost flexibility and could cut share repurchases, as necessary, or reduce dividends to shore up liquidity.
Performance under stress
An analysis of large IMs, including those rated by Fitch and others with publicly-available information, assumes a 30% drop in equities and a 20% decline in fixed income, a 5% reduction to fee rates and immediate net outflows of 7%.
It concludes that larger IMs with more diversified business models and investment strategies will be better able to withstand the shock of falling fee revenues.
