By Simon Miller
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 according to a report from Fitch Ratings.
Setting out key considerations when assigning asset manager ratings, the agency said that smaller asset managers were typically privately-owned organisations with a smaller and more concentrated customer/asset base and limited staff.
As a result, smaller managers presented certain challenges for institutional investors that may focus on size as one way to mitigate reputational and operational risk.
However, Fitch added, 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.
In addition, institutional investors emphasised 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 created challenges for smaller asset managers said the ratings agency.
"Managers rated Adequate (M3) and higher demonstrate many of the attributes considered important by institutional investors," says Aymeric Poizot, 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."
The agency said smaller managers could 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," added Davie Rodriguez, senior director in Fitch's Fund and Asset Manager Rating Group.