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The recently announced fund group mergers appear to be placing the investment industry on a path where we have fewer, larger competitors. Should clients be excited by this trend: a world where active investment management firms see size and scale as the next big advantage?
We are doubtful. That is because the motivation behind these mega mergers appears to serve the interests of the shareholders, ahead of end savers. In theory, this may seem a confusing statement because if investment managers do not deliver value to their clients, they have no business. But this is not really the case in practice. As numerous academic studies regularly show, the average active asset manager under performs the index and yet their businesses continue to thrive. The FCA appeared to pick up on this point, in their Asset Management Market Study interim report last year.
We also think that the interests of the shareholder of a mega firm are mostly at odds with the end client of an active manager. Usually such shareholders are short-term focused, so want the business to gather assets, run many products, have good short-term return numbers and employ multiple investment philosophies. The law of large numbers – based on the premise of having hundreds of funds availabl – means they have diversified profit streams and scale and get rewarded by the market because their quarterly earnings numbers become more reliable. This, we suspect, is why the share prices spiked for both Standard Life and Aberdeen post the announcement of the merger.
But clients should hope for the opposite – all else being equal, they should prefer active managers celebrated investment focus, contained assets under management and took a longer-term view. This more client centric business model usually translates into lumpy returns to shareholders, but stronger returns to clients.
To talk specifically about both mergers – we are more comfortable with the Henderson/Janus deal because they have not often found themselves competing directly with each other in the past. Their areas of specialization and client segments have been quite different and the merger should not be too drawn out. Equally, the odds of substantial investment team departures and fund restructures – the source of uncertainty for clients – is fairly small. In some ways, it was quite similar to the Columbia/ Threadneedle deal that concluded in 2015.
However, we fear that the SLI/Aberdeen merger will create greater uncertainty for clients. Outside of Asia, they appear to compete directly in most markets and have investment approaches that are quite different. On the equity side, for example, Aberdeen like quality stocks at fair prices. SLI, in contrast, focus on change happening to the companies and industries they find attractive. If anything Aberdeen avoids change, with their focus on companies that are reliably boring, that keep compounding at high rates. These are non-overlapping magisteria in our view. And, as a thought experiment – what would investment managers on the UK, European or Global equity desks on both firms be thinking? It must be unsettling for them and therefore their clients. And lets remember, staff will be cut – these are human capital businesses, whose assets leave the building each day at 5pm. Cost cutting is a central premise of these deals.
When we see mergers, particularly large ones with complex drawn out integrations, we tend to advise our clients to be very cautious allocating capital to either firm. The cuts to staff and funds can be quick and ruthless and even for the teams that remain, the anxiety of worrying about job security is an unwelcome distraction. The newly joined up firms may well have a more diversified earnings stream and a reduced cost base, per employee. But the pursuit of the illusive excess returns could be dampened by the big business mindset and the process of fusing two firms can be painful, drawn out and unsettling. Caveat emptor.