The race for asset management scale is well and truly on, and it appears a buyer’s market for firms with the available capital, given how low stock prices are these days. US-based Invesco, for instance, is trading around $10 a share, down from $32 three years ago; even at the start of the year before Covid-19 hit it stood at just $17.67.
At least six major fund houses are either actively up for sale or would be available if the right price were offered, AsianInvestor understands. Most of those names are bank- or insurer-owned firms with hundreds of billions of dollars under management (AUM) that are seen as being non-core to their parent groups’ business.
With asset managers already under fee and cost pressure before the pandemic, the outbreak has further added to their challenges. Listed firms in particular are being pushed by shareholders to hit certain metrics in respect of AUM, revenues and cost cuts, one experienced Asia-based asset management executive told AsianInvestor.
And mergers in the industry are only getting bigger, with the latest – Franklin Templeton’s takeover of US rival Legg Mason – completing this month to form an entity that holds $1.5 trillion of client money.
This trend has led some to raise concerns about the concentration of money in fewer hands, but asset owners to which AsianInvestor has spoken seem generally sanguine about it. In any case, a growing number of large institutional investors appear to be moving towards having fewer but deeper relationships with trusted external partners.
Some, such as Anne Fossemalle, head of private equity funds at the European Bank for Reconstruction and Development, see this trend as having downsides, particularly for smaller, less popular investment markets.
CONSOLIDATION PROS AND CONS
But executives from large asset managers, unsurprisingly tend to argue that the benefits of consolidation outweigh the disadvantages. One example is Mark Browning, Franklin Templeton’s former head of Asia Pacific, who is set to leave the firm at the end of this year.
Asked his thoughts on the pros and cons of industry consolidation for clients before the Templeton-Legg Mason merger completed, he told AsianInvestor: “You could argue there will be a concentration of assets and power in the hands of a few mega-managers – which might eliminate choice, but I think there’s a fair way to go to get to that stage.”
On the plus side, Browning argues for the various upsides of M&A. “For both asset owners and asset managers, consolidation is a driver for efficiencies, cost competitiveness, the ability to offer multiple asset solutions. That’s a benefit for asset owners because they want to deal with a smaller number of trusted partners.
“You will have a situation where boutique managers who specialised in niche strategies are going to do very well,” he added. “And the middle-tier managers will be challenged, because they will have more and more regulation, and profit lines will be squeezed.”
Browning envisages the big asset managers getting bigger, the boutiques surviving and the mid-tier firms having their margins further compressed.
Ultimately, he said, clients are moving more towards deeper relationships with trusted partners, with some markets gearing more towards an ‘outsourced CIO’ model.
As clients in Asia become more sophisticated, their needs become more specialised and thus fund houses need more specialist expertise, Browning noted.
“It’s gone from the early days when you only used to speak to the client on the mandate you ran for them to more of a solutions approach. Even if your mandate is one asset class, you may be speaking to them about the portfolio as a whole and it’s more focused on solutions and outcomes than in the past.”
Hugh Young, head of Asia Pacific at Aberdeen Standard Investments, another recently merged group, echoes some of Browning’s points, though he is franker about the challenges that fund houses faces.
“There is a lot of pressure on [asset managers], as there has been for years,” Young told AsianInvestor. “If you look at our annual reports over the years, you’ll see evidence of pretty major fee compression.
“That prompts consolidation, for us and others,” he added. “And it also promotes spinoffs, as you’re still seeing – people leaving major houses to concentrate on their speciality.”
Like Browning, Young suggests that the worst place for an asset manager to be is “somewhere in the middle”, between the very large firms and the boutiques – typically with an AUM of over $50 billion but less than $1 trillion.
And, similarly, Young suggests there remains plenty of choice of managers for clients. “There are still a lot of firms out there – there’s not an oligopoly.”
“But it’s harder and harder to start up a small firm with just a desk and a telephone because the costs are so high from a regulatory standpoint and because of client expectations,” Young added. “So, a certain squeezing out of the low end of asset managers is taking place.”