The stable sector outlook for global investment managers (IMs) in 2019 reflects growing scale and product diversity, which should provide a degree of cushion against multiple sector headwinds, Fitch Ratings says. However, traditional IMs may be more challenged in 2019 versus alternative IMs, given passive management dynamics, higher regulatory compliance costs and greater fee sensitivity to market volatility and/or corrections.

Investment managers with diverse franchises, robust profitability metrics, strong liquidity profiles and manageable leverage levels are viewed positively from a credit perspective, Fitch notes.

"Market downturns could give rise to consolidation and/or investment opportunities for IMs with sufficient financial flexibility and/or undeployed capital. Traditional managers may be more likely to seek consolidation versus alternative IMs to offset secular pressures while seeking to gain scale and diversifying into higher margin products," the ratings agency said in a press statement.

A market correction and/or increased volatility could become a headwind in 2019 for traditional IMs, further exacerbating fee and net asset inflow pressures, particularly those IMs with more limited scale or franchise positions. However, this could be a relative benefit for active IMs, which could regain lost asset flows, provided they are able to deliver returns above market indices

Alternative IMs' solid fundamentals are supported by the locked-in nature of the majority of the fee-earning assets under management. Management fees are expected to continue to rise, although fees realized from drawdown vehicles may slow amid the challenging investment environment, the analysts advised. 

Alternative IMs are expected to continue to focus on the expansion of permanent capital vehicles, given the relative management fee stability and investment flexibility afforded. Capital deployment has been challenged by the competitive credit market conditions and current elevated entry multiples. In the absence of market dislocations, measured capital deployment would be viewed more favorably.