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Continued European AM growth faces deflation and demand threats

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Despite strong growth over the last five years in assets under management (AUM) in Europe, the outlook is marred by the threat of eurozone deflation and by potentially slower growth in the of core institutional investors.

That’s according to Fitch Ratings, which estimates that the total AUM in the European asset management (AM) industry reached EUR17.8trn in 1H14, driven by inflows and performance in approximately equal measure.
 
Compared with end-2013 the firm’s 1H14 estimate represents a six per cent increase. If the current trend is sustained then full year asset growth in 2014 could exceed the growth in 2013 and the constant annual growth rate over the last five years: nine per cent in both cases.
 
Fitch's base-case macroeconomic forecast is for the eurozone recovery to gradually strengthen and to avoid deflation, supporting the industry. However, other outcomes are possible and risks are skewed to the downside. Deflation would likely be negative for the industry both in terms of asset prices (and hence, performance) and, potentially, outflows.
 
Continued AUM growth may be stymied by the asset base of core institutional investors – pension funds and insurers – in the industry. Growth of AUM from these investors has lagged that of the European AM industry overall. Pension funds and insurers account for around half of the industry's total AUM. Furthermore, inflows to European mutual funds from non-domestic investors have slowed, stabilising at around one quarter of total mutual fund AUM. As competition intensifies new money entering the industry may be increasingly "hot" and subject to rapid withdrawal.
 
Fitch believes solutions capabilities will be a key competitive differentiator for AMs. However, competition in this segment will be intense as asset managers strengthen or acquire solutions capabilities and increasingly compete against institutional investors' direct investment teams. In a potentially tougher operating environment it will also be important for AMs to maintain low leverage to protect their creditworthiness.

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