Natixis Global Asset Management’s agreement to acquire a 51.9% stake in Investors Mutual Limited (IML) in Australia marks the latest example of fund houses consolidating in order to raise revenues and keep a lid on costs.
The IML acquisition is the Paris-headquartered Natixis’s first major acquisition in Australia, although the company has had an office in Sydney in since 2015. Fabrice Chemouny, Natixis’s head of Asia Pacific told AsianInvestor the asset manager is keen to grow in Asia via partnerships or transactions as well as organically.
“Australia, and the wider Asia Pacific region, is an important part of our expansion strategy, and we plan to continue to invest across the region over the coming years,” he said in emailed answers to questions.
“The acquisition will increase our exposure to the local retail market and the Australian superannuation industry and reinforce our distribution platform in Australia,” he added.
Chemouny noted that Natixis GAM could also look for opportunities to expand its affiliates into Australia using IML’s expertise. He declined to elaborate.
Natixis has 22 affiliates listed on its website. These include Emerise, a Singapore and Paris-based emerging markets specialist fund house, and H20 Asset Management, an alternatives fund manager.
The French fund manager’s announcement follows a series of high-profile mergers and acquisitions in the global fund management industry over the past 18 months.
In August, Aberdeen Asset Management completed its merger with Standard Life; a month earlier Amundi finalised its merger with Pioneer Investments; while in May Janus Capital and Henderson Global Investors (HGI) put the final touches on their merger.
Dealogic, a capital markets data provider, estimates investment management companies to have conducted 245 M&A deals worth $13.56 billion in the year to October, higher than the combined value seen during 2016. And many experts expect the pace of consolidation to continue—with more high profile acquisitions being announced in coming months.
Natixis itself has been recently linked with speculation of a merger with Axa Investment Managers, along with BNP Paribas Asset Management, according to a Reuters news report.
There is one simple reason for this spate of M&A activity: active fund manager assets under management (AUM) and profits are under threat.
A host of factors are behind this development, including regulatory and cost pressures, heavy competition from low-cost passive funds, and the need to seek out higher growth markets, according to experts.
An annual report by consultancy BCG in July said the value of the global asset management industry (including hedge funds) grew by 7% last year to $69.1 trillion. But most of this was due to rising asset values. Net new AUM flows were a tepid 1.5% as of January 1, little changed from recent years, BCG said.
In its report, the consultancy expects traditional active asset managers to continue losing both revenues and AUM. “Alternatives, solutions and specialities will persist in generating strong fees—along with passives—and will dominate the growth of AUM.”
Active managers are particularly feeling the pinch from rival low-cost passive funds, which has squeezed their margins.
“The pressures from active versus passive strategies mean than active managers need to find ways to reduce the cost of investment activities to compete with low-cost product strategies,” Justin Ong, Asia Pacific asset and wealth management leader at PwC Singapore told AsianInvestor.
In such a challenging operating environment, it’s becoming difficult for mid-sized active asset managers to have a presence in every market by themselves. It’s also encouraging fund houses to outsource their back-office and/or middle office operations.
“Building onshore operations in every country is difficult because of cost considerations, so instead asset managers are trying to access distribution channels through companies that already have the set-up in place in those countries,” he said.
A good example of that is the Janus Capital-HGI merger. Janus Capital acquired a stronger European footprint while HGI gained a bigger presence in the US, according to experts.
Regulatory and other cost pressures are forcing companies to think about merging and sharing resources. Europe’s Mifid II is a good example. The incoming regulations are likely to make life tougher for fund houses dealing with European counterparties and clients, as it insists on them separating the costs of research and trade execution.
“These [cost] pressures are showing no signs of abating. So the chances are we are now in what could be a busy period for more consolidation,” Rob Adams, head of Asia Pacific at the newly created Janus Henderson Global Investors, told AsianInvestor.
Ong noted that on average, the cost income ratio of asset managers operating in Singapore varied between 60% and 70%. Mergers help fund managers manage this ratio in two ways. First, only really large fund houses have any scope to pass through higher costs to their clients.
Second, consolidations offer potential economies of scale. It costs relatively less for larger fund managers to meet compliance and regulatory requirements than smaller sized ones and they can spread the costs out more evenly, said Wing Chan, director of manager research for Asia at Morningstar.
Even companies purely seeking asset growth are increasingly looking to keep their expenses down, which could lead to more outsourcing.
Clive Bellows, head of global fund services, Europe, Middle East and Africa at Northern Trust, believes asset managers are looking to outsource more non-core functions as they focus on managing assets and generating alpha.
In February this year, Northern Trust, which offers services such as wealth management, asset servicing, asset management and banking in different markets, announced its intention to acquire UBS Asset Management’s fund administration services in Luxembourg and Switzerland. It completed the acquisition by early October.
Yet while cutting costs through size remain top concerns for fund houses in the US and Europe, Morningstar’s Chan said Asia’s asset growth potential could well outweigh cost concerns for firms in the region, at least over the next few years.
“The overall share of mutual funds in total household financial assets in Asia remains quite low and with markets such as China continuing to grow rapidly, cost pressures appear to be less of an issue relative to more mature markets,” he noted.
Mutual fund penetration (as a share of household financial assets) in Asian markets such as China, India, Singapore, Korea and Taiwan, averaged 10.4% in 2015, according to Cerulli Associates.
Fund houses want to benefit from that opportunity. However, meeting the regulatory needs of multiple jurisdictions isn’t cheap or easy. It’s yet another good reason for fund managers to consider consolidations or alliances, as Natixis has just demonstrated.