GLOBAL - The independence of asset management firms will become increasingly important and will drive further consolidation over the long-term, according to Barclays' senior executives.
Barclays believes asset managers have been gradually seeking independence through consolidation over several years because intermediaries are increasingly looking for independence from the firms they work with and recommend.
More specifically, Bob Diamond, president of Barclays, the parent company of BGI and ETF provider iShares, argued during a conference call today that it was no longer possible to operating both investment banking and institutional investment together because regulations in countries such as the US, for example, prevent firms from working with both divisions.
"Our experience suggests it will be extremely difficult to extract further synergies from asset managers where they are part of a broader banking group," said Diamond. "What we have seen is, it was a nuisance for Barclays Capital to do business with BGI. This would be best achieved through strong partnerships, not full ownership.
"What is happening in the industry is increasingly clear, and that is around independence. If you look at the assets under management of the 50 largest [companies] in the world, those who are independent versus those from banking, has risen from 30-50%.
"It is increasingly difficult for a bank like Barclays to have a top tier position in institutional banking and institutional investment. That became increasingly clear with the acquisition of Lehman Brothers. This [structure] gives us a much clearer path," he added.
Part of his argument stands on the deal Barclays has done with BlackRock to partner on certain segments of business, as Barclays Capital can now act as a service provider to BlackRock, while BlackRock can in turn distribute products via its Barclays Wealth division - a move Diamond argued would not have been possible before.
The Barclays Global Investors deal with BlackRock is actually second time lucky. Varley confirmed the prospect of a similar transaction had been discussed with BlackRock earlier in the decade.
Today's announcement also follows a number of similar deals, whereby large banking groups have divested themselves of their asset management units.
In February 2006, BlackRock acquired Merrill Lynch Investment Managers to create an entity that then had over $1trn (€710bn) in assets under management.
And in June 2005, Legg Mason acquired Citigroup's asset management business, which then had $437bn in AUM, in exchange for its private client brokerage business.
John Varley, CEO at Barclays Group, added the management was firmly of the belief that the investment management industry would consolidate towards independent operations and said Barclays shareholders would see improved benefits as a result of the "breakout" strategy it was taking.
"We feel confident that this is the optimal structure in investment management business for the next 20 years," said Varley.
"The trend is clear: If you look at BlackRock transaction, with happened at Legg Mason, Putnam, SocGen and Credit Agricole, they have put their asset management businesses together, there are a number of empirical evidence [signals] together which say this is the way the business is trending. It is partly as a consequence of clients and partly as a result of regulation," added Varley.
While the deal does make BlackRock the largest asset manager in the world, it still only gives the combined firm an approximate global market share of 3-5%, according to officials.
Similarly, not all asset management CEOs agree that consolidation of larger players is perhaps the best way to go to achieve value for clients in today's market conditions.
Rupert Clarke, CEO of Hermes, which manages the UK's BT Pension Scheme assets, argues in IPE's forthcoming Top 400 European Asset Managers 2009 supplement, that while further industry consolidation is on the cards he believes it could harm the interests institutional investors.
"There will be further consolidation, but not necessarily to the benefit of institutional investors. If not structured properly large-scale mergers will lead to a stifling of innovation and a reduction in the ability to generate alpha," said Clarke.
In contrast, Peter Chambers, CEO of Legal & General Investment Management, said smaller operations would struggle to operate economies of scale, but felt consolidation may not be right for the industry.
"Further disclosure, an expectation of greater transparency and a high level of operational capability may require a critical mass and level of investment that may be more difficult to obtain from smaller operations," said Chambers. "Consolidation may help institutional investors to get what they need from investment managers, but innovation should not suffer as a result."
IPE's Top 400 Asset Managers 2009 asks asset management senior executives whether they believe consolidation will be good for institutional investors.The full report will be published with the July edition of IPE.
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