Over the past 10 years, the M&A trend within the wealth management industry has been firmly established. The number of firms offering investment services has declined, but the size of the remaining firms has grown significantly.
While one can debate the merits or otherwise of this trend, it has certainly been beneficial for the shareholders of these businesses. The client experience is harder to judge. Among a number of unintended consequences, one that concerns me is the effect consolidation has upon the product manufacturers – namely the fund managers, particularly boutique fund managers.
I am not an apologist for this part of the financial services market; I am an active, as opposed to a passive, investor. However, I have noticed a worrying trend when it comes to new entrants into the market being given a fair shake of the stick.
This is not in reference to the large, but unheard of, foreign-domiciled managers making a play for the UK market, but rather for the home-grown entrepreneurial manager who wants to run their own business.
Gathering assets is a challenging goal for any group but, for the newly launched single manager, it is substantially more difficult.
Historically, when the number of fund-buying wealth managers was higher, there were more decision-makers. The smaller number of decision-makers nowadays has led to greater use of centralised investment processes, which is understandable, given the larger client banks involved.
However, one side effect of this, in my view, is a lack of entrepreneurial spirit from fund buyers. This is highlighted in the form of the hurdles a new fund has to clear in order to make it on to a buy list.
As the weight of assets for many fund buyers is much greater than it once was, small, independent fund managers find it increasingly difficult to get on this list, not least due to fund size. Many large fund buyers have, for very good reasons, minimum fund sizes before they consider investing due to their weight of assets. The associated consequences for the small fund manager are that this initial minimum fund size has been grown substantially over the past 10 years.
This leads to a vicious circle: while having strong performance, these funds cannot raise assets commensurate with that level of performance until a major fund buyer puts them on a buy list – and buyers aren’t prepared to do this with small funds.
While this dilemma is most pronounced at the small boutique fund manager, the introduction of seed investor share classes – which I am all for, as they reward the early investor – shows that the larger fund houses recognise the problem too.
This dynamic has led, in my opinion, to the large funds getting larger. On the flipside, it has also left more undiscovered gems for the smaller wealth managers, who take the time to seek these opportunities and provide a more differentiated fund choice.
Ultimately, the very good small funds will eventually be noticed by all parties – but it is those who were there first who are able to capture the outsized alpha.
James Calder is research director at City Asset Management
.
