M&A the key to asset manager survival, report says
Asset managers have had a “banner year” in 2017 with strong net inflows and stellar fund performance, but concerns remain over rising costs and growing regulatory and compliance pressures, according to two new reports.
According to Boston Consulting Group (BCG), assets under management (AUM) at the 30 global fund managers it tracks grew by 14% over the course of the year.
Net new flows also peaked at an “extraordinary” 4.3%, “the highest they’ve been in the 10 years since the global financial crisis”, BCG noted in its report, The Hidden Pressures on Asset Managers.
Since 2013, net flows have increased by an average of just 1.5% a year.
Across Europe, a similar picture emerges, according to a separate report from Moody’s Investors Service, the credit rating arm of the US financial services company.
Within its own survey group of 21 European asset managers, net inflows over the course of the second half of 2017 soared to €135bn – “equivalent to 1.5% of AUM at the beginning of the period”, Moody’s said. Over the same period in 2016, the groups posted net inflows of €30bn.
Overall, AUM for the managers surveyed increased by 6.6% over the course of the last six months of 2017.
Yet pressures remained, not least in terms of costs, both companies warned. Size, particularly in terms of AUM, remained critical.
“If you look at profit margins by size you see a barbell – a U-shaped curve,” said Dean Frankle, principal at BCG.
One on the one side, there were managers with $800bn-$900bn (€670bn-€750bn) under management reporting high margins, similar to boutique players at the other end of the size spectrum, he said.
“But those $400bn-$500bn asset managers – who are certainly big, but not as large as the biggest – are not,” Frankle continued. “If you’re investing in new things, such as artificial intelligence, then a trillion-dollar firm can afford, in absolute dollar terms, a lot more than you can.
“What you are seeing is that the big are getting even bigger and that is placing even more strain on the middle managers.”
There were two solutions, Frankle said: either become more niche “or look to M&A to try to address your growth opportunities”.
The fund management industry has seen a wave of mergers and acquisitions over the past few years.
Last year, Janus Capital Group merged with Henderson Global Investors, and Amundi, Europe’s largest asset manager by AUM, snapped up Pioneer Investments for €3.5bn.
However, consolidation proved positive for total management fees, with the overall level sharply higher over the last six months of 2017, according to Moody’s.
Among the group tracked by Moody’s, total fees earned grew by 12.7% in the final six months of last year, compared with the first half.
“About half of the increase in fees we recorded was due to the acquisition of asset managers previously outside of Moody’s surveyed group, for example the Janus-Henderson merger and the acquisition of Pioneer by Amundi,” said Marina Cremonese, senior analyst at Moody’s.
“However, the other half is down to market appreciation, higher performance fees, as well as positive net flows.”
As companies have sought to bolster revenues, smart beta strategies also reported a notably strong year. BCG’s report revealed that AUM within smart beta had grown by 30% a year since 2012. However, at $430bn, overall assets remained just 0.5% of the global total.
Asset managers were looking more keenly at the margin on high-volume products such as exchange-traded funds, which can have very low fee structures, said Nicolas Rabener, managing director at FactorResearch.
“They are not a high-profit-margin product, so smart beta, where you can charge 30-50bps depending on what you are issuing, is much more profitable,” he said.