Fitch Ratings has updated its methodology for rating asset managers to reflect the changing shape of the asset management industry and lessons learnt from recent market events. It has also unified its rating scale.
Asset manager ratings are intended to provide investors with an independent assessment of an asset manager's vulnerability to operational and investment management failures. However, most investors tend to pay closer attention to a fund houses' track record -- even if it is often stressed that past performance should not be treated as a guarantee for future performance -- and the specific manager involved in a particular fund.
All Fitch-rated asset managers, namely traditional asset managers, fund of hedge fund managers, collateralised debt obligation asset managers, and real estate asset managers will now be rated on a scale from 'M1' to 'M5', with 'M1' indicating the highest rating. This unified scale emphasises the common general framework and creates greater consistency and comparability across the range of rated asset managers and underlying investment approaches.
In response to the challenges facing asset managers in the current difficult operating environment, Fitch has been placing increased emphasis on an asset manager's financial condition and business sustainability. A low score on this measure would result in a low overall asset manager rating.
This methodology revision also reflects the increasing importance Fitch has been giving to: governance, organisational structure and third-parties involved; integration of risk management with portfolio management processes; and portfolio management coordination and processes relating to the generation and implementation of top-down macro views.
This update takes place as the current financial crisis has put an end to the past decade of rapid growth of the asset management industry which, at its peak, reached $70 trillion in assets under management (AUM) globally, according to Fitch. Estimates indicate that global AUM shrunk by approximately 20% to 25% in 2008 as a result of market value declines and investor redemptions. Fitch also notes that there has been a major shift towards lower-risk and lower-margin assets
"The viability of many asset management business models is under considerable pressure, which leaves them more exposed and vulnerable to investment or operational failure that may result from staffing and cost reductions, changes in strategy or reorganisation," says Aymeric Poizot, head of Fitch's Europe, Middle East and Africa fund and asset manager rating group.
As a consequence of the rating scale harmonisation, ratings for fund of hedge fund managers, real estate managers and CDO managers will soon be converted to the 'M' rating scale. For these ratings, Fitch has developed specific criteria subsets to incorporate, within the general asset manager rating framework, the distinctive features of such specialised asset management activities resulting from their heavy focus on due diligence conducted for the selection of less liquid assets.