UBS Asset Management is now open to inorganic growth as it looks to boost revenues, the firm's global president has told AsianInvestor, amid the rising trend towards consolidation in the funds industry with its attendant implications for investor clients.
Asked whether the $805 billion Swiss fund house would consider acquisitions, Ulrich Koerner said during a visit to Hong Kong: “Four or five years ago, we couldn’t even think about inorganic opportunities. But today, after our transformation, we are in a position where we could consider [a transaction], after properly assessing the opportunity, commercial viability and whether it is a fit with our group.”
A spokeswoman for the firm said this could include establishing more strategic partnerships and joint ventures.
The asset manager has so far focused on organic growth and over the past four years has been busy reorganising its operations with a view to boosting both cost efficiency and assets under management. This came after a period of stagnation between 2008 and 2013, during which time its AUM remained roughly the same, leaving it lagging the competition.
But the firm staged a rebound from 2014 to 2017, said Koerner, outpacing the 4% annualised asset growth of the funds industry to go from Sfr580 billion ($600 billion) to Sfr710 billion ($805 billion) as of end-2017.
“I think we are well under way with our transformation, although we can possibly do more in terms of driving revenues,” he said.
UBS AM's efforts to boost AUM come against a backdrop of continuing mergers, acquisitions and cutbacks in the global funds industry, which is struggling to stay profitable amid heavy downward pressure on fees, a flight of money into passives and rising regulatory burdens such as those imposed by the Markets in financial instruments directive II.
Just last week US firm Federated Investors said it was acquiring a 60% stake in UK-based Hermes Investment Management for $350 million. That has followed mergers to form Aberdeen Standard Investments, Janus Henderson Investors and the joint Amundi-Pioneer group in recent years.
Another approach has been to cut teams in certain areas. Old Mutual Global Investors laid off its three-person Asian equities headcount this year, while earlier this year French firm Axa Investment Managers closed down its multi-asset desk in Hong Kong. Meanwhile, firms such as BlueBay Asset Management and EII Capital have shut offices in Asia in the past year.
Consolidation in the asset management industry reflects a growing preference for institutional and distributor clients to have deeper relationships with a smaller number of fund houses, but it also has pros and cons for these clients. On the one hand greater scale can mean lower fees, but it can also lead to greater concentration risk.
Koerner said he expects the pace of consolidation in the asset management industry to pick up over the next few years as pressure from the flight of assets to passives and increasing regulatory costs pile up.
This is a widespread view among industry experts, who argue the tough environment is forcing more asset managers to consider different tactics to remain profitable.
“The regulatory and compliance requirements and competitive pressures mean companies are focusing on scale and multiple strategies to drive profitability, said Matthew Phillips, financial services leader for China and Hong Kong at consultancy PwC.
“Many larger managers are finding they need to have multiple income streams such as actives, passives as well as alternatives to stay competitive,” he told AsianInvestor.
Koerner said the asset managers most vulnerable to these changes will be those with assets between $50 billion and $400 billion, again reflecting a widely held view.
“It’s the mid-sized managers who will find it harder to survive,” he noted. “Fund houses that have relatively narrow but highly specialised capabilities that can generate strong returns will always have a place in the market. The really large firms can also survive, assuming they have critical mass and can balance their offerings.”
Fund houses that do manage to have multiple income streams, including passive products, are better placed to generate scale and thereby gain a price advantage by charging lower fees, said PwC’s Phillips.
Fund fees in Asia Pacific (as a percentage of assets) have fallen to 0.82% by 2016 from 1.37% in 2012, and that trend is set to continue, noted Elliot Shadforth, asset and wealth management leader for Asia Pacific at EY.
The squeeze on manager fees by distributors and instutional clients and the need to develop technology and distribution channels are putting significant pressure on margins, noted Phillips.