Firms strong enough to face down weak flows, growing margin pressure.

Despite weak flows of new money and intensifying competitive pressure on their margins, the credit profiles of traditional investment managers remain solid, according to Fitch Ratings.

In a new report, the rating agency said that the financial fundamentals of traditional fund managers have largely proven resilient to headwinds, such as tighter margins and muted net flows of new money in 2024.

The fund sector’s credit profiles, “benefit from generally low leverage, sound profit margins, limited credit risk exposure and mostly resilient assets under management,” the firm said.

“In Fitch’s view, recurring management fees will remain under pressure largely due to higher competition, reducing the fund managers’ earnings potential, but from a generally high level,” the report said.

The report also noted that fund firms focused on mass retail clients are more vulnerable to outflows, “due to their clients’ higher risk aversion in uncertain financial markets and an increase in competing products…” Firms that cater to high-net-worth investors or institutions, “have generally benefited from more resilient net new money flows and are well positioned for challenges in 2025.”

While traditional managers can defend their franchises, and their margins, by seeking scale and developing products that are not easily imitated by passive managers, such as alternative strategies or by launching active ETFs to compete with passive products, the report also cautioned that, “the roll-out of more complex, illiquid products to high-net-worth individuals may expose investment managers to reputational and regulatory risk.”