Investors eye impact of big mergers on boutiques

In March, Standard Life and Aberdeen Asset Management announced they would merge their two businesses to create a combined firm with assets totalling £660bn.

This announcement came months after asset management giant Henderson announced its plan to join forces with US firm Janus Capital.

John Husselbee, head of multi-asset at Liontrust, said the winners from the merger of these mega companies will be the smaller fund groups.

He said asset managers that oversee £2bn to £40bn will be the “sweet spot” that fund groups want to be in as these big mergers come along, largely because smaller boutiques have more nimble funds.

Smaller firms risk entering a downward spiral of lower profitability. Mark Hardwicke

“These large mergers open the door wider for these boutiques,” Mr Husselbee said, suggesting larger companies with multiple strategies might have a more “diluted focus”.

Dan Brocklebank, who heads up boutique fund house Orbis Investments UK, agreed that smaller firms will benefit from consolidation, particularly those focused on providing good performance.

This comes amid increasing pressure from the regulator to stamp out closet trackers, which Mr Brocklebank said have been milked as cash cows.

Looking to the future, the Orbis boss said there will be a clear separation between “marketing-driven” firms, which are focused on selling funds and getting bigger, and those groups driven entirely by performance. 

However, Mark Hardwicke, managing partner of investment bank Invenio Corporate Finance, took a very different view. 

"Conventional wisdom would suggest that if there is consolidation in the market then this removes competitors at the smaller end, providing opportunity for those [larger firms] remaining. 

He admitted that consolidation does present an opening for smaller managers to gain market share, as the overall competition falls, while institutional investors reallocate their funds to manage portfolio risk.  

“However, this is a simplistic view and we will likely only see this behaviour at the margin.”

This obsession of big being beautiful and safer is deeply flawed, which time has shown. Alan Steel

Mr Hardwicke said consolidation does not address the majority of problems faced by small managers and the factors driving the mergers.  

“The mechanics of the market are materially different for those at the top to those at the bottom,” the Invenio founder said.

“Of course, smaller managers are taking note of the consolidation in the market, but it does little in the way of altering daily business.”

Yet, he stressed that the same issues driving consolidation remain, including the increased regulatory burden and associated costs, outflows from actively managed funds, and stumbling performance.  

Mr Hardwicke said consolidation makes it harder for sub-scale fund groups to attract and retain top talent, meaning they risk entering a downward spiral of lower profitability and poor performance.

Alan Steel, director of West Lothian-based Alan Steel Asset Management, said he likes boutiques, or managers who think like them.

“This obsession of big being beautiful and safer is deeply flawed, which time has shown.

“Talented managers find it stifling in big fund management firms," he said, adding: "Personalities don’t thrive in these boring spots."

Mr Steel also said platforms make it much easier for the boutiques to attract business. 

Alex Reynolds, financial adviser at Advies Private Clients, said the mergers should in theory drive down costs for large fund groups, which could make funds from smaller groups look more expensive.

He said significant consolidation could dilute the diversity of investments available in market as groups merge their funds together, therefore creating funds which may not perform as well because they are too large.

katherine.denham@ft.com