EquitiesMar 18 2013

The fund management industry is under pressure

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The rally in markets since the start of the year has provided some respite for the UK asset management industry, but regulation – the RDR plus a raft of European legislation – is still exerting pressure.

The market has been shaped by consumer preference for fixed income and managed solutions, and this has largely determined the winning groups in the past 12 months, but there are signs that this is starting to change.

As fewer advisers recommend funds and more have begun to outsource to discretionary fund managers, the market has crudely divided into those managers providing ‘solutions’ and those providing ‘components’. Those providing solutions, particularly income solutions have undoubtedly seen the lion’s share of fund flows in 2012.

Cofunds data shows that the Mixed Investment 20-60 per cent Shares sector – formerly known as Cautious Managed – accounted for 74 per cent of net sales in January on the platform.

Peter Toogood, investment services director at Morningstar, says that looking at a company such as Newton, 10 years ago flows would have been driven by the ‘flair’ managers, such as Clive Beagles on the UK Higher Income fund, but now flows are driven by Iain Stewart’s Real Return fund. This is a symptom of how the momentum in the industry has changed.

This has been the main driver of performance of different groups. For example, flows into its Global Absolute Return Strategies (Gars) fund have generated a 40 per cent rise in assets under management (AUM) for Standard Life Investments from December 2011 to December 2012.

For Jupiter, the five Merlin multi-manager funds now hold more than £8bn of assets with the Income portfolio, which is also a member of the Investment Adviser 100 Club of consistently outperforming funds, accounting for roughly half of that. Mr Toogood says: “Anything that has been multi-income or multi-asset has been strong.”

The market has also been shaped by the dominance of bonds over equities. Of the larger groups, Investment Adviser 100 Club member M&G has been a notable winner, with AUM rising by 16.7 per cent, largely driven by fund flows into Richard Woolnough’s various corporate bond funds. There has still been room for some equity solutions, but the big winners have largely been income-based.

The Newton income franchise – global, emerging and Asian – continues to raise funds for the group and Invesco Perpetual continues to generate flows into Neil Woodford’s range of funds.

To some extent this also answers the question of who are the more vulnerable groups. Those that have been equity based, particularly with a focus on the unloved UK All Companies sector, have been weak unless, like Liontrust, they could demonstrate notable outperformance.

Equally, groups where there has been notable ‘distress’ have suffered. Groups that have seen outflows in 2012 have been Neptune, where AUM are down by less than 10 per cent, and Martin Currie, which has seen outflows of 27 per cent. Scottish Widows Investment Partnership’s (Swip) most recent results reported net outflows of £6.6bn for 2012.

Fund selectors are on the look out for merger and acquisition (M&A) activity. Tim Cockerill, head of research at Rowan Dartington, says: “M&A can be very disruptive. It distracts managers from their day jobs especially where there is a lot of uncertainty as to who is going to be the lead manager when old responsibilities overlap and only one can have the job in the new shop.

“It’s hard to build into planning, so unless there is a reason to be concerned I just look at the funds. An explicit example would be when it is known a company is up for sale or there has been a ‘problem’ in a company at the future is unclear.”

As such, distress can compound quickly, as was seen with Gartmore – investors withdraw money as problems begin. Mr Toogood believes that, for the time being, M&A activity is likely to be confined to ‘distressed’ situations. “I don’t believe that there will be much takeover activity outside of distressed situations. Fund managers don’t want to do it and it’s not necessarily the best time to do it either. And after some improvement in markets, no-one is particularly under the cosh.”

Of course, smaller quoted groups such as Investment Adviser 100 Club member Liontrust are always likely to be vulnerable to take-overs, but after a substantial recovery in the group’s profits and the popularity of the group’s Special Situations fund, the price may be higher than fund groups would be willing to pay. More distressed groups such as Martin Currie are privately owned and therefore less vulnerable, but are not immune.

The whole industry is under pressure from the passive sector. Vanguard has seen 190 per cent growth for the year. Investors are becoming more price sensitive post-RDR. In their most recent results, Jupiter announced an increase in AUM of £3.5bn to £26.3bn, but a fall in net revenues as initial fee income decreased.

The fund management industry is under pressure. However, for the time being a revival in equity markets has stepped in to prevent any distress among managers, except for some situations. M&A activity picks up if the climate substantially strengthens or weakens, but managers are unlikely to commit to deals while it remains uncertain.

Cherry Reynard is a freelance journalist