Fundamental changes in the way that investors use passive funds and ETFs have seen the asset management industry adapt to a new landscape against the backdrop of a broadly supportive economic landscape, according to a report from Moody's Investors Services.

The emergence of new smart beta products that combine active and passive features as well as the increase of passive as a replacement for previously active participation are among the key drivers.

However, Neal Epstein from Moody's warned that "fundamental challenges remained" for an industry where the outlook has been revised from negative to stable. "Actively managed products that are most susceptible to passive substitution look increasingly redundant, and competition with cheaper passive products is driving fees lower across the industry."

Macro levers such as the upcoming Mifid II regulations which come into effect as of 1 January and which includes among its provisions a push for greater fee transparency will also act as further incentive for investors to seek out lower-cost investment options.

The Moody's report points out that in response products are being designed to address risks across multiple asset classes with smart beta ETFs and multi-asset portfolios being two examples.

Pointing to the recent flurry of M&A within the asset management sector, the Moody's report suggests they reflect an "industry in flux". In the ETF space, the sector has seen a number of large deals this year including the dual deals for separate parts of the ETF Securities business involving WisdomTree and Legal & General (LGIM).

Moody's said that deals between large complementary organisations have fortified their market positions, adding that acquisitions of products in either more defensible or more dynamic industry segments allow acquirers to adapt to change, with potentially less financial risk.