“Their primary duty is to make money for their clients but they are also beholden to their shareholders.
“If you can put someone else’s assets on your book and reduce a substantial part of your cost, that is going to seem like an appealing option.
“Markets are broadly strong, which means asset management companies should be more cash-generative and be able to build up a war chest to acquire other firms.”
Baird adds: “The regulators want to see a simpler world where you have fewer players so they are more easily controllable and the risks are more transparent. I suspect there could be a regulatory tailwind to asset management mergers.”
When done right, consolidation can also be a helpful tool to diversify businesses and make them more resilient to a drop in markets. That is precisely the reason River and Mercantile decided to merge with pension consultancy business P-Solve in 2014.
The merger created what their head of wholesale distribution Mark Thomas calls “a multi-asset financial services company”, placing River and Mercantile’s specialist equity boutique, pension, derivatives and fiduciary services all under the same roof.
“People felt at the time it was an interesting move,” he says. “We were a bit more forward thinking in doing that. A small, specialist boutique is always going to be susceptible to market fluctuations. A more diversified business is going to be better protected.”
Although Thomas understands why a company like a Standard Life and an Aberdeen would band together to cut costs, he says there is still room and opportunities for smaller players that can deliver high active share specialist funds.
“We don’t feel any pressure to try and find an asset manager partner,” he says. “Clearly, there is regulatory pressure on all asset management businesses in the form of compliance and fees, and people do need to address that.
“Because we are a boutique offering superior returns above the benchmark, we can continue to justify our fees. Whereas if you are a large company, managing billions of pounds in investments, there is a much greater chance of you not producing above-average performance.”
