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Rising Interest Rate Environment a Mixed Bag for Asset Managers

Rising rates will help asset managers that run money market funds, but will likely prove a headwind to firms focused on fixed-income, writes Morningstar’s Gregg Warren.

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For traditional asset managers, a rising interest rate environment is a mixed bag. For firms that offer money market funds to investors, rising interest rates would be a positive. For much of the past eight years, fund companies offering government agency and treasury funds have had to waive fees because historically low interest rates have left yields after expenses in negative territory. The general consensus is that once the fed funds rate gets up to 100 basis points, it would eliminate the need for most fee waivers. However, we're not entirely convinced that money market fee rates will return to the levels seen before the 2008-09 financial crisis, when cash management funds were generating fees of 27 basis points; we believe we'll probably see rates closer to 20 basis points, if not lower, as institutional clients push back on fee rate increases.

For asset managers as a group, a rising interest rate environment is a net negative for firms running fixed-income strategies. Those managers will have to deal with the potential impact of market losses on bond portfolios (as interest rates rise) and outflows (as investors respond to bond fund losses). That said, we expect market losses to be more of a problem than outflows--especially for the more institutional-focused managers like  BlackRock (BLK) and  Legg Mason (LM) (with most institutional investors having already reallocated their exposure to the asset class to accommodate a rising interest rate environment). Firms with heavier retail exposure are likely to see the combined impact of market losses and outflows, but with most of these companies having less than 25% of their total assets under management dedicated to the asset class, the impact is lessened somewhat.

Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.