A consolidation in the active asset management sector has been on cards ever since these firms watched the trickle of assets flowing into passive investments turn into a flood.
The process now appears under way: the merger of Janus Capital Group and Henderson Group completed in May and Standard Life and Aberdeen Asset Management announced their intention to merge in March.
Aberdeen and Standard Life aim to create the UK’s largest standalone asset manager, with assets of £670bn, and the second biggest in Europe, behind Amundi.
Martin Gilbert, chief executive of Aberdeen Asset Management, says: “There is a significant advantage for asset managers to either be large or small; it’s much trickier to be medium-sized.”
Mr Gilbert says the merger will create a world-class investment company that is more diversified than either individual firm. “The businesses are complementary,” he argues. For example, Aberdeen Asset Management’s equities strength lies in emerging markets and small companies while Standard Life is better at developed markets and UK small cap, he says. There is similar split for fixed income; Aberdeen is better at emerging market debt while Standard Life excels at developed market credit.
The combined group will not, however, be reliant on only equities and fixed income. Mr Gilbert says: “There will be five separate business lines, which will include investment solutions, real estate and private markets as well as equities and fixed income.”
Equities, fixed income and solutions, the latter of which includes absolute return, liability-aware and diversified growth products, will be the largest business units with assets of £152bn, £184bn and £183bn respectively. Real estate and private markets/hedge fund solutions are much smaller at £34bn and £28bn.
These five businesses translate into a combined fee income of £2.5bn and pro forma operating profit will be more than £1bn. The company has said it expects to make cost savings of £200m and to cut 800 jobs over three years, largely through natural turnover, out of a total of 9,000.
But the combined group does not want to rely on cost cutting to improve profitability; it wants to use its scale to grow the business by leveraging the limited client overlap. Mr Gilbert says: “Among the combined group’s top 100 clients, we have only four in common.”
This should enable the merged entity to cross-sell its products. Mr Gilbert says: “For example, we can go to an existing Aberdeen client and tell them about our global credit business or an existing Standard Life client about our emerging market equity products.”
Over the medium term, the merged group would aim to improve its share of the US market. Mr Gilbert says: “We have complementary client channels in the US; Aberdeen is much more institutional whereas Standard Life is stronger in wholesale.” The group aims to introduce a wider range of capabilities to these difference audiences, he adds.
Aside from achieving greater market share in the US market, the combined group aims to grow its assets under management with a focus on ‘new active’ assets. These are defined are alternative assets, such as private equity and infrastructures.
That definition also includes ‘solutions’ such as Standard Life’s global absolute return fund and ‘active specialities’, a focus on fundamentally driven, unconstrained, benchmark-agnostic funds. Mr Gilbert says: “Many of our funds have tracking errors [the difference between the performance of a fund and the benchmark] of 7% to 10%.”
This focus on ‘new active’ reflects the pressure the active management industry is facing from providers of passive funds.
Mr Gilbert says: “The days of active managers just hugging a benchmark have passed.” Clients will no longer pay high active fees for funds with only a 1% tracking error. He adds: “And the regulator is paying much closer attention to these types of funds.”
While Mr Gilbert argues both Aberdeen and Standard Life have, so far, been relatively insulated from this force because of their respective specialisations in emerging market equities and absolute return, the new group’s focus on ‘new active’ underlines the pressure this trend will continue to place on the active management industry.
But the rise of passive is not all doom and gloom for active managers. Mr Gilbert says: “It’s easier to outperform a market that has a large proportion of passive funds.”
If most of the market is tracking the indices, it makes it easier for fund managers to pick stocks effectively, he says. Mr Gilbert argues the company’s larger scale will enable to better achieve this aim of growing the business by focusing on ‘new active’. He says: “A large global business can afford to have fund managers based in local markets.”
This helps to attract assets because clients prefer managers with local experience. Mr Gilbert says: “Local knowledge can help a fund manager to outperform substantially.”
However, it is still important to have strong local talent. “Only good fund managers will succeed,” says Mr Gilbert.
Local offices will also enable the newly merged group to be closer to their global clients. The combination of a local sales force and fund manager could, for example, help an Indonesian insurance company to develop a liability-matching strategy.
A larger business also has greater access to some of the world’s largest institutional funds. Mr Gilbert says: “If a sovereign-wealth fund wants to invest £500m, it will only pick an asset manager with sufficient scale.” The sovereign wealth fund would not want to own 90% of the fund, he adds.
Both Aberdeen and Standard Life have a greater proportion of institutional investors than many of their UK peers, which should help to keep asset flows less volatile. Mr Gilbert says: “Institutional clients understand, for example, that if value is underperforming, your value fund will also underperform.”
Collecting large sums of money from a few institutional investors requires a smaller sales team than amassing small amounts from a large number of retail investors. However, there is a downside. Mr Gilbert says: “Losing an institutional client can be very difficult because the assets they invest are so large.”
Keeping institutional investors onside requires more than simply ensuring the funds to which they have allocated capital perform well. Mr Gilbert says: “The LGPS wants us to take responsibility to ensure the companies we have invested [in] are well governed.”
There is an increasing focus on ethical, social and governance factors among global institutional investors. Mr Gilbert says: “These are no longer ‘nice to have’ but an essential part of the investment process.”
Mr Gilbert hopes that the greater scale of the merged Standard Life and Aberdeen Asset Management group will help to attract more funds from the LGPS, once pooling has been completed. “Only larger fund managers can take large pools of money,” he says.