TowerGroup Explores Coming Impact of Credit Crisis on Asset Managers

19 May 2008

Asset managers have to date weathered the subprime crisis far better than their sell-side counterparts. However, new research from TowerGroup finds that the credit crisis will ultimately severely impact asset managers, with a much longer lasting effect on their business than on other sectors of the securities and investments industry. The biggest impact on asset management will be felt indirectly though a decline in fees, as investors reallocate assets to less risky investments like money market funds or to other “passive” investment vehicles that generate lower fees.

For the remainder of 2008 and continuing into 2009, TowerGroup believes that the investment management business will be faced with eight critical issues driven by the credit crisis:

• Lower fees due to the fall in assets under management
• Shift in asset allocation to lower-paying assets
• Inability to cut costs quickly
• Greater scrutiny from clients, consultants, and the investing public relative to issues like performance, management of risk, counterparty exposure, etc.
• Possible new government regulation responding to the credit crisis
• Pressure to better value nontraditional securities and structure products like collateralized debt obligations and credit-default swaps
• Revised thinking about the use of and exposure to various types of derivatives
• Reassessment of current enhanced risk management strategies

To address these concerns, TowerGroup recommends that asset managers redouble efforts to examine their internal risk management measures and processes, in order to ensure that they quickly and correctly value their exposure to risky assets and communicate this to fund boards and investors. TowerGroup also recommends that asset managers resist the urge to wholly withdraw from using derivatives or structured products – and instead, 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 TowerGroup research report, titled “Why Asset Managers Will Not Escape the Subprime Meltdown That Has Decimated Wall Street,” authored by Dushyant Shahrawat, research director of the Investment Management practice at TowerGroup, describes the nature and extent of impact of the subprime crisis on the asset management industry – to date, and in the months to come. It also explores how asset managers will reassess their use of derivatives, as well as their risk management measures, as a result of the current credit crunch.