Big is not beautiful
I have mixed views about big fund managers merging. It is not obvious what the benefits are for us at Wasserdicht Pensioenfonds. Our consultant has traditionally (and I think mistakenly) recommended big firms simply because they were big. But big to huge to utterly enormous is not a life cycle that allows managers to remain client focused, at least not according to recent correspondence we have had.
‘Dear Pieter… you will have heard that… has been successful in acquiring control of…. we are convinced that… synergies… partnership… access to more product… will not affect your portfolio with us… merging of two successful firms… common culture of excellence… client benefits… global reach… call with any questions… sincerely… John, Director of Client Service.'
And so I called John who says: ‘It is too early to say what the results will be.' ‘But your letter states everything will be fine and our portfolio will not be affected.' ‘Well it shouldn't be, all the mechanics of the merging will be happening at the fringes.' ‘So there is no talk of job losses, merging of investment teams, and perhaps even bringing client service teams together?' ‘Well yes, but we are confident that performance and service will be enhanced.' ‘But John, why does our consultant lower your rating from ‘buy' to ‘hold'? ‘They have to do that because corporate M&A creates questions and uncertainty.' ‘And why don't you address that up front and let us and other clients know how the risks will be minimised?' ‘Yes, good point, perhaps we should.'
And I call our consultant's head of research in London. ‘Pieter, yes the new rating reflects organisational concerns. We just do not know how things will develop. Efficiencies will be made across the two firms which of course is normal practice.' ‘In what ways do you think this combined entity will help improve the performance of my portfolio?' ‘Come on Pieter, I don't think it is about that, the merger is all about the shareholders, not client service and optimising performance.'
Then to the final call of the day to my own consultant in Amsterdam. ‘Gerrit, I have just spoken to your head of research.' ‘Yes, he e-mailed me.' ‘I want you to introduce me to some boutique asset managers, where there is organisational stability, low staff turnover, a true focus on service and good performance.' ‘Why?' ‘Because big is not beautiful, and I do not want any inter-organisational politics affecting the people managing our pension fund. We have enough challenges in the markets as it is.'
‘But we have tended to focus on the bigger and well recognised firms.' ‘I know, but I thought you also made a point of researching new and emerging managers, discovering talent where your competition had not.' ‘Ah yes, I had forgotten that.' ‘But your colleague also showed me how I might really benefit.' ‘How?' ‘Where possible we will try and buy some of their shares.'
Pieter Mullen is investment director at Wasserdicht Pension Funds