A drop in funds under management for one of Australia's largest asset managers could be a warning of things to come as volatility risks crimping asset values and performance, says Morningstar analyst John Likos.

Magellan Financial Group's (ASX: MFG) funds under management (FUM) for November were slightly lower month on month but continued their rise after a period of sustained outperformance.

But net inflows of $522 million weren’t enough to prevent an $870 million reduction in total FUM to $72.1 billion.

Likos expects a slowdown in growth in FUM for all pure-play asset managers owing to investment performance if market volatility extends into next year, and global interest rates rise.

The US Federal Reserve increased the target for the bank's benchmark rate by 0.25 per cent, to a range of 2-2.25 per cent in September, and are expected to hike the fed funds rate by a quarter point next week.

"Asset managers are facing a challenging near-term future on several fronts," Likos said.

"Having benefitted from the global liquidity tailwind of quantitative easing across Europe and the United States in recent years, the coming years will not be so kind as the US and Europe move to quantitative tightening.

"If easing had the impact of lifting asset valuations to long-term, if not all-time, highs, tightening is likely to reverse much of this.

"Falling asset prices threaten to damage performance numbers, which could lead to lower FUM and net outflows."

Since its inception in 2006, Magellan has returned 11.6 per cent a year as at June 30, about 250 basis points above the stated performance objective of 9 per cent.

However, if volatility persists, the objective will be "difficult to meet", Likos says.

Despite the challenges, Likos is confident in Magellan's ability to navigate increasingly challenging times and maintains a $28 fair value estimate. Magellan last traded at $25.02.

Investment performance has driven Magellan's FUM from about $58 billion at the end of 2017 to $72.1 billion today. This excludes the Airlie Funds Management acquisition in early 2018, which added about $6.2 billion to FUM.

Beyond markets, Likos says the asset-management industry continues to face structural risks of falling management fees as passive vehicles proliferate and competition intensifies.

"Australia’s managed funds industry remains the envy of many markets with its strong growth rates supported by the mandated superannuation guarantee scheme," he said.

"As the pool of funds continues to grow, as it will, new entrants will continue to be attracted to this market, putting pressure on incumbents to evolve and prosper."