BofA downgrades UK asset managers over recession risks and weak flows

According to a research note published by Hubert Lam, Philip Middleton and Alexandre Tissieres on Monday (9 January), the bank has changed its outlook for Schroders and Ninety One from Neutral to Underperform, joining Jupiter, Ashmore and abrdn. 

The researchers pointed to Schroders as the asset manager with the most earnings sensitivity to an economic downturn, which is set to affect the UK the most, coupled with weak flow momentum in mutual funds and LDI-driven redemptions at UK pensions. 

Meanwhile, analysts expect continued institutional risk aversion and higher retail client redemptions from Ninety One, whose valuation does not currently reflect near-term flow headwinds from de-risking, they said. 

Alternatives adds £5bn to Schroders net inflows while mutual funds leak cash

The bank expects continued cyclical and structural pressures driving outflows from traditional asset managers. Despite its positive view on fixed income, BofA strategists are cautious on emerging markets debt entering 2023, which is negative for Ninety One and Ashmore. 

Beyond the UK, BofA is cautiously optimistic about the European asset and wealth management sector, which fell 36% in 2022, as it expects flows to recover after the worst year for equity markets and outflows since the Global Financial Crisis. 

“Although risk aversion remains elevated near-term, we forecast net new money to turn modestly positive in 2023 as the economy troughs and rates peak in H2. That said, flows are likely to remain below average,” said Lam. 

In the current climate, the bank prefers wealth managers to traditional asset managers, which are deemed as more resilient and less sensitive to a recession than retail asset managers given their affluent client base. 

Julius Baer, which has seen its share price rise by 30.3% in the last three months, according to Morningstar, was upgraded from Buy to Neutral. 

abrdn set to return to FTSE 100

BofA also has Buy ratings on Amundi for fixed income exposure and alternative asset manager Man Group, given its lower market beta and strength in liquid alternatives, while keeping a Neutral position on DWS. 

Although the researchers remain positive on structural growth in alternatives, including private markets and hedge funds, they see near-term headwinds on fundraising and performance fees. 

In light of this, the bank has downgraded Swedish private equity manager EQT to Neutral from Buy due to its greater concentration risks, while promoting the Swiss private markets firm Partners Group to Buy, given its lower dependence on performance fees, vintage and buyouts. 

“That said, private market managers continue to benefit from growing management fees that are unaffected by fund valuations, compared to traditional managers, which are more volatile,” the analysts added.