“Slowing growth, sticky inflation, ongoing geopolitical tensions, inflated asset valuations and other late-cycle risks will pose greater challenges to the global [investment management] sector next year than in 2025,” Fitch said.
These headwinds will also impact Canadian pension funds, which is expected to weigh on their investment performance, it noted.
“We expect the first-order effects of U.S. trade tariffs to be manageable, given geographical and asset diversification. However, second-order effects, including economic growth and inflation implications, could be more meaningful,” the report said.
Along with these macro challenges, pension funds are also facing liquidity pressure in their private equity portfolios, it noted.
“Competition for investment opportunities remains intense, particularly in private markets. Pension funds are prioritizing the optimization of manager relationships and, in some instances, scaling back direct investments,” it said.
Additionally, Fitch said that it expects pensions’ funding ratios to face increasing pressure as plans mature and demographics worsen.
“Ageing memberships are driving net outflows, making the funded status increasingly vulnerable to market shocks,” it said.
That said, Fitch said that Canadian pension funds are supported by “captive inflows, long-term investment horizons, strong asset overcollateralization, and ample liquidity” — which also provides them with “a substantial buffer to absorb potential investment losses.”
For the global investment management business overall, competition has also intensified, and commoditized products are facing rising pressure on their fees, the report said.
Traditional fund managers will be hit by these challenges earlier than alternative managers, “due to more variable fee and fund structures,” it said. The impact on alt managers will be lagged “because of locked-up capital and longer-term investment horizons,” it added.
Additionally, firms with niche investment strategies will be better able to resist the downward pressure on fees, it said.
Against that backdrop, industry consolidation is accelerating, it said, as larger firms “benefit given scale advantages, operating leverage in their business models and enhanced diversification in an uncertain and evolving market.”
In particular, Fitch said that it expects more combinations between alternative and traditional investment managers in 2026, “as they seek to increasingly penetrate the retail and wealth management channels.” However, these kinds of deals will also face increased execution and reputational risks, it noted.