ActiveApr 24 2017

Virtues of fund manager consolidation in doubt

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Virtues of fund manager consolidation in doubt

Economies of scale created by merger deals will do little to alleviate the problems currently stifling active managers, the business development boss of Nucleus has said.

Last month, Standard Life and Aberdeen Asset Management struck a deal to merge the two businesses, pointing to potential cost savings of £300m.

This is the second big asset management merger in less than six months after Henderson announced its plan to consolidate with Janus Capital back in October.

Creating scale has been heralded as a way for asset managers to cope with the increasing demands imposed on their business, as firms grapple with the rising popularity of cheap passives and the mounting pressure from regulators.

Just because you’re bigger doesn’t make these problems go away Barry Neilson

However, Barry Neilson, the head of business development at platform Nucleus said these mergers will not necessarily mitigate these issues.

Speaking to FTAdviser, Mr Neilson said asset managers are the final part of the industry to be modernised.

“Most of the mainstream asset management groups won’t be feeling particularly confident about their ability to maintain their profit margin in the future.

“Standard Life and Aberdeen have clearly taken the decision that scale is good, though I’m not sure scale actually allows them to circumnavigate some of the issues in the industry.”

He said, for example, that fund groups will have to dramatically reinvent the way they design and distribute products in order to gear-up for a technological landscape.

Part of the problem, Mr Neilson said, is the growing disconnect between what fund groups create and what products investors want, which he claimed is caused by the bulk of distribution information now being held by platforms.

He also pointed to the trend towards passive funds and the struggle some managers face trying to make money in a low-return world, adding: “Just because you’re bigger doesn’t make these problems go away.”

The impact of these mergers, he said, is likely to be a rationalisation of funds on platforms.

“Previously it was about having a really broad fund range and hoping a few funds will have good performance at one time.

“Now these fund groups really need to understand what their distribution strategy is, and which segment of the market they are trying to appeal to; some groups are clearly trying to be all things to all men, which is not a sustainable strategy.”

Steven Richards, investment manager at Thesis Asset Management, said the merger of Aberdeen and Standard Life appears to be commercially driven.

 Scale for the sake of scale is not the answer Campbell Fleming

He said talks seemed to revolve around the cost savings from cutting back products and workforce, which he suggested could create an “uneasy environment” for those working for both firms.

“We would like to think some of these cost savings would directly benefit investors rather than shareholders, but until more detail is known, we remain cautious and are not presently investing into any Aberdeen or Standard Life funds."

Lee Robertson, chief executive of Investment Quorum, said he agreed that scale does not necessarily help to overcome issues in the industry. 

However, he said both players in the Standard Life and Aberdeen merger have an excellent track record when it comes to overcoming serious problems affecting their businesses over the years.

“By combining the best of senior management and fund management available within both firms going forwards, creating cost and distribution efficiencies they may well be able to deal with the very obvious real issues currently facing active managers.”

Yet Alan Steel, director of Alan Steel Asset Management, said being bigger hasn’t made others in the past any better, and said the focus is always about companies considering the best way forward for their business.

Responding to the comments, Campbell Fleming, global head of distribution at Aberdeen Asset Management, said: “Scale for the sake of scale is not the answer.

"The proposed merger is about recognising the challenges and opportunities that lie ahead and then considering what the best way forward is as well as improving choice for our clients."

He said the merger will help the combined company weather the headwinds facing the industry and allow it to invest in its people and technology, while also delivering better choice and service for clients.

katherine.denham@ft.com