The UK asset management industry – the world’s second largest – is in a state of flux. Competition and cost pressures are disrupting the status quo among its 1,840 authorised firms, which collectively manage £7trn of assets and employ 50,000 people. Notably, 10 per cent of those assets are managed in Scotland.
Although uncertainty over Brexit negotiations represents a critical challenge in the short term, not least in relation to future passporting rights and asset managers’ continued ability to sell funds freely across the European Union, broader opportunities remain in the medium to long term. Successful asset management of the future seems likely to favour bigger firms with strong global brands offering a full suite of services alongside small targeted managers with unique product offerings.
Performance levels
Until recently, performance levels have been robust with asset management firms delivering average profit margins of 36 per cent. But fees are under pressure amid the push for greater transparency and comparability from investors, as well as scrutiny by policymakers and regulators. For active managers, the compliance costs of increased reporting standards and burdensome regulation are eroding margins, with MiFID II and undertakings for collective investments in transferable securities (Ucits) being the two most prominent causes.
Meanwhile, the growth of cheaper passive funds continues to threaten active management business by offering investors similar levels of risk and return at a fraction of the cost.
Rising technological and data management advancements are also putting a squeeze on margins. So are commercial costs, as firms grow distribution networks and product manufacturing capabilities to take advantage of opportunities in developing markets.
In response to these diverse pressures, market consolidation has been inevitable to mitigate risks and remain competitive. This is illustrated by the last two years of record mergers and acquisitions activity across the industry, primarily driven by regulation costs and the shift toward passive management.
In October 2016, Anglo-Australian Henderson announced a £4.7bn merger with US rival Janus. This deal ‘of equals’ is anticipated to deliver around $110m £86m) in cost savings by creating one of the world’s top 20 largest independent investment houses with combined assets under management of more than $400bn.
The most recent example is the £11bn mega-merger announced in March between Standard Life and Aberdeen Asset Management (AAM) – a deal that will combine £660bn in assets and make it the largest active investment management firm in the UK and second largest in Europe.
Standard’s virtually nil-premium proposal for taking over AAM is a clear signal of fee pressures, highlighting the importance of reducing costs and achieving scale. Overall synergies from the deal are expected to deliver annual cost savings of £200m – a figure that surpasses £1.3bn when taxed and capitalised.
Consolidation will be fuelled by significant economies of scale. The increasing regulatory burden, particularly acute for smaller asset managers, will create even more compliance costs, putting further strain on industry margins and precipitating more mergers.
Evolution
In their scope of activity, asset managers will continue to evolve. As deleveraging of banks continues, they are expanding their reach into areas dominated by the banks, such as primary lending, secondary debt market trading including distressed and nonperforming loans, primary securitisations and off-balance sheet financing.
