There has been an incredible amount of consolidation in the asset management industry in recent times, but even more notably so over the last 12-18 months, possibly as a result of the pressures on margins as firms struggle to survive in what has been a chaotic and challenging period, writes Alex Kay, head of investment proposition at Novia Global.
RBC’s takeover of Brewin Dolphin, Tilney and S&W, Miton Optimal & Ravenscroft, and Liontrust buying Majedie to name a few. The general direction of travel would appear to support increased M&A activity, but does this provide an investment environment more conducive to the end consumer, or is this simply big business scaling up to ensure continuation and survival within an incredibly competitive marketplace?
Costs
Typically, whenever a merger is announced in the asset management industry, the usual rhetoric around supporting clients, greater ability to meet the needs of clients, and ‘client centric focus’ is usually not far behind. Understandably, where two sets of firms are largely doing the same thing, mergers can in theory enhance and synergise those businesses by cutting costs, utilise shared expertise and create operational efficiencies.
This can lead to cost savings, but are these savings always passed forward to the end client who sees the ultimate benefit. A general trend of reduced fund annual management charges (AMC’s) and ongoing cost figures (OCF’s) maybe evidence of this.
A portion of OCF is made up of fund manager cost, but also includes administrative costs and marketing costs. Significant savings here as a result of a merger may well be passed on within the OCF, hence the end consumer gains through reduced costs.
It could be argued that many funds in certain sectors have become largely commoditised, hence the differentiating feature is no longer the performance of the fund itself (given the nearly perfect performance correlation with one another), but the cost to the consumer of buying the fund.
But should cost be the dominant feature when considering funds, or is it access to unique thinking, intellectual property, choice and variety that should be given greater precedence. It should probably be a good mix of all depending on the clients’ preference.
Competition
At Novia Global we have naturally always operated closely with both fund managers and discretionary fund managers (DFMs) where a lot of this activity has taken place. There are admittedly hundreds, if not thousands of competitors in this space, each vying for a slice of the pie.
For fund managers, many of the costs involved with operating funds in terms of Mifid, AIFMD and Brexit regulation and compliance for example have increased exponentially, but the fund charges for clients have increasingly reduced in the apparent ‘race to the bottom’. That sum does not add up, less revenue with increasing costs will only lend itself to a couple of eventualities.
We have seen the likes of Vanguard and BlackRock utilising their size and dominance to drive prices for some of their multi-asset funds down very close to zero, the impact of which could likely squeeze many of the smaller, boutique managers to the point where business could likely become close to being unviable.
But what is the net effect of this price competition, and is this driving greater M&A activity?
Consumers as a result are clearly able to access expert investment strategy at much cheaper cost, therefore choice and accessibility has increased. Will this be to the detriment of innovation amongst some of the smaller fund groups, who rely on their IP and agility to manage investment strategies, and who may become unable to compete with some of the incumbent players.
We only have to look across to another industry and see the dominance of a certain large US multinational retailer for one such example of this in action. Smaller fund groups’ only choice might be to integrate into larger firms, which could stifle innovation, often one of the key negative features typically associated with monopolistic markets.
Perhaps it is a blend of this along with larger players looking to gain scale that is driving more and more M&A activity. If that is the case, then we may well continue to see much more activity in the coming months.
This article was written for International Adviser by Alex Kay, head of investment proposition at Novia Global.
