However, it is the larger deals have caught the eye. Importantly, both Janus Henderson and Standard Life Aberdeen were described by analysts as “defensive” moves borne out of a need to shore up positions rather than with an eye on major expansion. Senior management at both firms disagree with this perception, but smaller peers may be asking: ‘if these businesses aren’t safe, then who is?’
It is not as simple as suggesting that only the sizeable will survive: fund buyers’ perennial preference for boutique offerings will help ensure the market remains relatively well balanced. With this preference in mind, some suggest it is the middle of the market that will be hollowed out: caught in a no man’s land between the giants’ economies of scale and the small players’ distinctive cultures, they are unable to establish a meaningful position.
It may be possible that the opposite is true. As the funds industry goes global in its reach, UK firms that once considered themselves to be mid-tier players in terms of assets under management (AUM) are now recategorised as smaller businesses.
This redefinition of the bottom end of the market could also be accelerated by the fact that the truly small are simply unable to continue operating in the face of greater regulatory costs. One significant change will be the introduction of Mifid II on 1 January 2018.
For asset managers, the most significant part of the legislation is the unbundling of dealing commissions from money paid to analysts for investment research.
As smaller fund firms tend to have fewer in-house analysts, the likelihood is that many will have been dependent on this external research to help generate ideas for their portfolios. Because it was previously bundled in with dealing charges, the cost of this research has hitherto been charged back to investors. In the new world, asset managers must conduct their own research, and raise their fees, or take the hit to profitability.
To this end, UBS analysts said last September that they “expect any consolidation to be focused on the small and mid-sized asset managers in the coming years, where rising fixed regulatory costs will compress margins the most.”
The pressures keep on coming for fund groups. The latest was in the shape of the FCA’s asset management market study published in June.
Some considered the final report to have a conciliatory tone, particular when compared with last November’s critical interim findings. But there are proposals that will increase the strain on providers, such as the need for at least two independent directors on funds’ boards. UK fund firms will be required to find around 480 independents as part of the plans to improve governance, which are estimated by the regulator to cost £27.7m a year.