(Aug 21): Insurance giant Prudential announced on Aug 10 that it would merge its asset management business with its UK and Europe insurance businesses to save costs and improve its products.

The 142-year-old company is only the latest in a growing list of financial services groups that have sought to bolster their money management units through a merger or acquisition deal. Other recent deals have included the union of Amundi and Pioneer Investments, which came together to form a £1.3 trillion ($2.09 trillion) asset management giant; the formation of Janus Henderson Group, now one of the world’s 20 largest fund houses with combined assets under management of US$345 billion ($470.4 billion); and the merger of Standard Life and Aberdeen Asset Management to form Europe’s second-largest fund house with £670 billion in AUM. Shares of the new entity, Standard Life Aberdeen, rose 3.2% to 424 pence on their first day of trading on Aug 14.

As investors pour more and more funds into low-cost exchange-traded funds, and as regulatory costs soar, firms that focus on traditional actively managed funds are scrambling to gain scale and maintain their profitability. Investors put almost US$500 billion into index funds and ETFs for the 12 months to May, while active funds suffered outflows of US$538 billion, according to fund flow tracker EPFR Global in a media report.

Fund managers in the active space have also struggled for years with the perception that they do not offer value for money to investors because they do not consistently deliver market-beating performance. The UK Financial Conduct Authority’s review of the active management space, published in June, found that active managers have an average profit margin of almost 40% and face very little price competition. In July, Natixis Asset Management was fined €35 million by French regulators for overcharging investors of its formula funds.

Now, even fund houses that have just completed merger and acquisition (M&A) deals are trying to further enlarge themselves. “Amundi will continue to explore value-creating acquisition opportunities to accelerate the group’s growth strategy,” says a spokesperson for Amundi, which only finalised its acquisition of Pioneer Investments last month. The group is particularly keen to increase its market share in Europe and Asia.

“I believe the trend will continue across the active asset management industry because there are too many fund groups competing for limited opportunities on an already-crowded product shelf,” says John Cappetta, head of funds specialists for Asia at Julius Baer. Just within the Asia-Pacific ex-Japan equity space, for instance, there are 127 actively managed funds registered for sale here. And, distributors of such funds might not be recommending more than 10 of them to investors at any given time. “If you take a maximum of 10 actively managed Asia-Pacific ex-Japan equity funds, that leaves 117 funds on the outside looking in,” Cappetta says.

As fund houses merge, what changes are likely to take place in the industry? And how will individual fund investors be impacted?

A state of oligopoly Alex Henderson, managing director for Asia at Janus Henderson, thinks the post-consol- As active asset managers consolidate, will fund investors be left better off? idation world of active management will be dominated by mega fund houses and boutique firms. “You’ve got to be something larger or something very small, like a boutique firm that serves family offices. Anything in the middle is not very good,” he says.

Janus Henderson was born earlier this year out of the merger of Henderson Group and Janus Capital, and reported its first quarter of results as a combined group on Aug 8. Net income came in at US$41.7 million for the three months ended June, down from US$46.3 million the year before. However, net investor outflows fell from US$7 billion q-o-q to US$1 billion. Investors greeted the news by sending the US-listed counter up 2.5% the next morning. “To play in this space, we need to go up the curve to something bigger. And that will give us a bigger footprint and recognition for what we stand for. You can’t do that if you aren’t something very big,” says Henderson.

While being able to spread costs across a huge pool of AUM is crucial, fund houses ultimately need to have products that are both useful and cost-effective. “Merged firms will succeed if they morph into solution providers and offer solutions that can be achieved cheaply. For the latter to happen, they have to use more technology [to digitise their processes],” says Gerard Lee, CEO of Lion Global Investors (LGI).

“The asset management business will end up being an oligopoly, quite similar to what we have in the smartphone and automobile companies,” he continues. “These oligopolies will be more like technology companies than fund companies.”

Earlier this year, LGI launched a smart beta fund called the LionGlobal Disruptive Innovation Fund. The fund claims to be passively managed, with holdings selected using a screening process that takes into account market capitalisation, volatility, sales growth, earnings-per-share growth and the price-tosales ratio. Its minimum investment amount is a mere $100, rather than the usual $1,000, to attract young professionals and millennials. The fund’s A-share class available to retail investors has a management fee of 1% a year.

To sidestep the commoditisation of traditional funds, some fund houses are looking to expand into new areas where there is less competition. “The real value-add will be in the private markets, such as private equity, real estate and infrastructure funds,” says LGI’s Lee. “These funds are not homogeneous or fungible and, as a result, are very difficult to commoditise.”

Fabrice Chemouny, the newly appointed head for Asia-Pacific at Natixis, says he expects the demand for private debt to grow. “We are seeing a lot of demand from South Korea and Japan, from the likes of pension funds. We expect this to [continue],” he notes. “[This sector] has good returns, limiting the risks. Due to regulations [and compliance], they need asset management vehicles, and there is no index. So, no one can do this on a passive level.”

Chemouny expects much of the growth to come from Asia-Pacific. Natixis had AUM of US$49 billion in Asia-Pacific as at end-June. Chemouny claims that the firm has grown 200% in the region over the last five years. “My aim is to double the amount by 2020. We will increase staff size by 20% to 25%,” he says. The asset manager is also looking for acquisition targets with minimum AUM of US$6.5 billion.

Private markets, ESG offer growth One growth area that could be uniquely suited for actively managed funds is the environmental, social and governance (ESG) investing space. The field has gained popularity in recent years amid the vocal debates on climate change and sustainability practices. Market regulators — including the Singapore Exchange — have set out guidelines on sustainability reporting.

“There is ample opportunity in this segment, more so as markets become more interconnected and therefore more volatile,” says Puneet Chaddha, who oversees the Singapore and Southeast Asia offices of HSBC Global Asset Management.

Standard Life points out that actively managed funds can effect “real change” in investee companies, unlike their passive counterparts. “Active allocation and stewardship of the capital investors provide are essential if we are to ensure that investments generate the badly needed long-term improvement in productivity,” says a Standard Life Investments spokesperson. “It is the effective allocation of clients’ money to productive investments that create a socially important role for asset managers and the opportunity to help restore trust in financial services.”

Little comfort for investors In the meantime, efforts by fund houses to fight competition through M&A deals might cause complications for investors with money in their funds. “The rising M&A trend is affecting people,” says Mohd Salim bin Mohd Amin, CEO of independent financial advisory firm Avallis Financial. “Some investors may not be comfortable with the change in corporate strategies of the new entities. We have seen clients [pull out from investments post-merger] due to changes in their offerings.”

Moreover, even if the fund houses succeed in improving their profitability by enlarging themselves through M&A deals, it is not clear if they will pass on any of the gains to investors through lower fees. Standard Life and Aberdeen expect to save £200 million a year after their merger. Prudential aims to save £145 million a year by 2022.

Chemouny of Natixis says it is unlikely that fees will fall further. “I think we have reached a certain [threshold] today that is already low. I believe it is a good level. We are close to the bottom. There is a point where it becomes dangerous to manage a portfolio without the capacity to invest in research. In certain European markets, some local players lower the fees [so much] that it becomes very difficult to compete.”

However, he does see fund houses experimenting with new fee structures. “I am a strong believer in performance fees as this is more aligned to customers,” he says. He also suggests that technology might help bring costs further down. “In Paris, we are experimenting with blockchain,” he says, referring to the open, distributed ledger technology that some experts say could massively lower transaction costs in the financial services sector.

Whatever the case, it might be too soon for investors to hope that the consolidation taking place in the fund management sector will result in lower fees. “Previous fund mergers in the past decade haven’t always delivered on promised cost-savings in a meaningful way,” says Arthur Wu, senior analyst at Morningstar. “Take the Henderson and Janus merger. They announced last October that the merger would result in an estimated cost savings of US$110 million, yet no long-term fee cuts for funds have been announced. Though we would like to see this happening, the industry’s record does not make a strong case.”

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