New research from advisory firm TowerGroup has predicted that the credit crisis will have a severe and lasting impact on asset managers.
So far, the brunt of the crisis has been felt by sell-side firms, but TowerGroup envisages that asset managers will feel the heat indirectly, through a decline in fees as investors focus their strategies on less risky money market funds and other passive investment vehicles. The report observes that $253 billion shifted to money market funds in January and February 2008
Looking to the future, TowerGroup believes that the investment management business face critical issues driven by the credit crisis. As well as the drop in fees, TowerGroup predicts rising pressure to better value non-traditional securities and structure products like collateralised debt obligations and credit-default swaps, revised thinking about the use of and exposure to various types of derivatives and greater scrutiny from clients, consultants, and the investing public on issues like performance, management of risk and counterparty exposure
To address these concerns, the report recommends that asset managers redouble efforts to examine their internal risk management measures and processes. Rather than wholly withdrawing from using derivatives or structured products, asset managers should work to deepen their understanding of the merits and dangers of these instruments, as well as the impact they can have on their portfolios, the report said.