Smaller asset managers can be more vulnerable to ‘event risk’ and present challenges for institutional investors in terms of governance, business stability and risk management controls, says Fitch Ratings in a newly-published report detailing key considerations when assigning Asset Manager Ratings to smaller asset management organisations.
Smaller asset managers typically are privately-owned organisations with a smaller and more concentrated customer/asset base and limited staff. As such, smaller managers present certain challenges for institutional investors that may focus on size as one way to mitigate reputational and operational risk. Still, in Fitch’s opinion, smaller managers may be able to address the concerns of institutional investors and compete with larger organisations, as investment acumen and operational risk are not always correlated to financial standing and size.
Institutional investors emphasise an array of factors in order to limit their downside risk when selecting asset managers — governance, risk management, investment processes and controls, operational risk and sustainability, reporting and client servicing. These factors often create challenges for smaller asset managers. Fitch’s Asset Manager Rating Criteria focuses on many of the same issues.
"Managers rated Adequate (M3) and higher demonstrate many of the attributes considered important by institutional investors," says Aymeric Poizot (pictured), Managing Director in Fitch’s Fund and Asset Manager Rating Group. "The report discusses the challenges smaller asset managers face and the attributes typically found among smaller managers that are rated Adequate or higher."
Smaller managers can mitigate business concentration risk by demonstrating shareholder commitment, multiple product lines, or niche market leadership, combined with sufficient cash and other financial resources to maintain sustainability and fund operations in adverse markets. A proven ability to navigate market cycles is also a prerequisite for stronger, higher rated managers.
"Reputable third-party service providers, thorough regulatory supervision, heightened transparency, an appropriate separation between functions and robust investment and control frameworks that go beyond compliance with regulation all serve to reduce concerns raised by smaller managers," says Davie Rodriguez, Senior Director in Fitch’s Fund and Asset Manager Rating Group. Staff dependency can be mitigated by the effective dissemination of expertise among several senior managers and a second layer of senior staff.
Smaller managers that carry higher ratings generally exhibit a strong self-imposed investment focus, dedicated operational staffing and well-identified procedures and investment tools. They use state of the art technology and solutions, with documented systems maintained by dedicated staff.