Barclays Global Investors. Citigroup Asset Management.
FRM. Ignis. Remember them?
Once mainstays in the global asset management
industry, these names have been merged into or acquired by larger companies.
The thirst for consolidation in this industry seems unquenchable—and there is
no end of targets.
A report from Moody’s in December said 2015 was
destined to be a bumper year for mergers and acquisitions in global asset
management. Regulation, fee pressure, and a move towards passive investing were
supposedly forcing smaller managers to take shelter in the arms of their larger
brethren.
Yet similar reports were written in 2013, 2011,
and 2009, and the number of managers remains largely the same. Why?
“It is a very fragmented industry,” says Stefan
Dunatov, CIO of the UK’s Coal Pension Trustees. From the dozen or so asset
managers with more than €1 trillion under management—only a handful of which
are based in Europe—there is a quick drop off to the mid-tier companies.
“In spite of the talk of impending consolidation,
it never actually happens,” Dunatov continues. “As soon as one asset manager is
bought by a competitor, another springs up in its place.”
“People like to own what they do, so they create new firms. Investors are sure they can find alpha and skill, so they go looking for them.”
—Stefan DunatovFor every acquisition—BNY Mellon buying Cutwater
Asset Management, Schroders buying Cazenove Capital, Natixis buying DNCA—there
are new boutiques springing up. Somerset Capital, Ardevora Asset Management,
Woodford Investment Management, and TwentyFour Asset Management have all
launched successfully in the UK in recent years. (Having an imaginative name is
evidently not a priority when starting out on your own.)
The companies being acquired tend to be more
established firms with multiple asset classes in their product range (think
Aberdeen’s acquisition of Scottish Widows Investment Partnership, or Standard
Life’s purchase of Ignis Asset Management), while the new boutiques specialise
in a narrow field of expertise, usually because they are launched by fund
managers moving out of the behemoths.
“People like to own what they do, so they create
new firms,” Dunatov says. “Investors are sure they can find alpha and skill, so
they go looking for them. It’s both supply and demand-driven.”
Art by Bill Mayer
In his view, “the market structure of fund
management is evolving.” In the years ahead we may see an industry dominated by
a “Big Four” or “Big Six” as is the case in other financial services sectors,
Dunatov argues, “with a lot of companies in the middle and a very long tail of
very small companies, with large amounts of turnover.”
What it might mean for institutional investors?
Given the choice, what would you prefer: Behemoth or boutique?
Size isn’t everything. Investment process, track record,
manager conviction, and several other factors will come into the mix before investors
consider a company’s scale. But far from being irrelevant, the size of a
potential asset management partner is definitely part of an asset owner’s
assessment and due diligence work.
For Stefan Ros, CIO of SPK, Sweden’s pension fund
for the banking sector, having a larger entity running a mandate has several
benefits.
Firstly, there is the obvious advantage of greater
support for the individual fund managers. “It is important they have internal
resources so they can achieve what they want to,” explains Ros. “For example, a
global equity manager requires more resources: you wouldn’t want just one
person sitting in an office doing all the analysis from his desk—it wouldn’t be
credible. But for a smaller regional manager, it could be.”
The benefits of scale are not just limited to a
pension’s existing mandate, however.
“We are quite a small organisation, so our
relationships with fund managers are very important to us,” Ros says. “If we
have a large fund manager running a specific mandate, then we are also
interested in other areas: other asset classes, capabilities, and services—for
example, producing analysis or asset-liability matching.”
Tolu Osekita agrees. The former CIO of the
Northamptonshire and Cambridgeshire pension funds also believes making the most
of relationships with big asset managers is important, particularly to smaller
pensions.
“We ran a small in-house investment team, which
meant we had to leverage our external relationships to get research done—you
can only do that with big firms,” he recalls. “We were looking at smart beta a
couple of years ago: we didn’t want something off the shelf; we wanted to build
our own. We couldn’t have that conversation with small boutique managers, but
with our large firms we could sit down to ask them to run an analysis and build
a report.”
Scale can be important for particular asset
classes or investment strategies, Osekita adds. For passive management, a large
firm like Vanguard with more than $3 trillion (€2.7 trillion) in assets can
bring efficiencies to its index-tracking funds as well as participating in
stock lending as a trusted provider. The benefits are then passed on to clients
in the form of ultra-low fees.
The same goes for illiquid asset classes, Osekita
argues, where “size is an advantage because you get better deals, which often
lead to better returns”.
“With liability-driven investing it’s a similar
story,” he adds. “Size matters because you’re buying an off-the-shelf product,
and it needs scale.”
There is also the IBM factor: “You don’t get fired
for buying IBM”, as the saying goes (even if the tech giant’s stock is down 17%
in the past 12 months).
“With a large manager, there is more certainty
that the company you’re employing will still be there in five or ten years,”
says Jeff Levi, partner at consulting firm Casey Quirk. “If you have a strategy
reliant on large managers you can get access to a lot of resources, and create
tailored mandates.”
However, not everyone buys the resources argument.
Chetan Ghosh, CIO of the Centrica Pension Schemes, claims the expansive
compliance, IT, and legal teams of the biggest groups are “a luxury.”
“Compared to what you want from your
manager—returns—the company infrastructure can’t be a driver of your
selection,” he says. “Even when you’re selecting a manager to just get beta
exposure, the same argument applies: you wouldn’t just pick a large manager for
the scale. You can look for better beta than that.”
Dunatov flips that argument around, agreeing that
larger companies have greater compliance and legal resources, “but they often
don’t have the best people managing the funds. But how much does that actually
matter?”
Stability, reduced costs, access to intellectual
capital—the big boys certainly have their distinct advantages. So why are there
still so many boutiques?
The answer may be as simple as
alpha generation. While scale is certainly an advantage for a passive manager,
the bigger an active fund gets, the harder it becomes for the manager to
outperform.
“Managers of smaller firms have the hunger to do well, and their interests are seen as being more aligned with those of the firm as it is their own neck on the line.”
—Dunatov“All things being equal, for active mainstream
assets a smaller manager with focus and conviction tends to outperform over
time,” says Osekita. “At Northamptonshire and Cambridgeshire, our best
performing manager was one we seeded from scratch, and it outperformed every
other manager in the portfolio consistently for 10 years. There is definitely a
lot of evidence pointing to an inverse correlation between size and
performance.”
Another important correlation at boutique managers
is between their own success and the success of the client. Centrica’s Ghosh
prefers to use boutiques and smaller managers for this reason.
“We have found that, for continuity, it is better
to stick with boutiques,” Ghosh says. “A lot of the larger firms don’t have the
remuneration or packages that are sticky enough to make the good managers stay.
I thought these firms would find a way to keep the managers that they
considered to be crucially important, but a recent case at one of our managers
proved it wasn’t the case.”
There are reasons other than remuneration why
managers flee behemoth groups for something smaller, of course—Bill Gross being
case in point. But for the most part, emerging and boutique firms’ compensation
schemes work to asset owners’ advantage.
“Often these smaller firms are run by managers who
have left larger firms,” Dunatov adds. “They have the hunger to do well, and
their interests are seen as being more aligned with those of the firm—and by
extension, the clients’—as it is their own neck on the line.”
Casey Quirk’s Levi believes alignment of
objectives forms part of an asset manager’s overall credibility, along with
investment strategy and the communication of its process. “This is where size
comes in,” he says. “When you talk to large firms you might be really far away
from the centres of thought and research. At smaller firms, there is often a
sense that you have access to the entirety of the business. The mandates often
mean more as well, so they will do more for the client.”
However, small firms—and in particular
startups—cannot always cope with sizeable mandates from larger asset owners.
Splitting a big equity allocation between several small managers is an option,
but as Dunatov queries, what would a large number of small mandates do to an
overall portfolio, even if they do outperform? “Do they move the needle? That
is certainly a factor for consideration,” he says.
Scalability was
one of the factors cited by Ted Eliopoulos, CIO of the California Public
Employees’ Retirement System (CalPERS), when announcing his intention to wind
down its hedge fund allocation. Few European funds can match CalPERS’ $300
billion (€272 billion) of assets, but at any size, asset owners would hope that
their managers can at least keep pace with the growth of their overall
portfolio.
“The decision is not necessarily between the behemoth and the
boutique—you want a blend in your portfolio,” says Osekita. In general, he
says, smaller managers are better placed for mainstream alpha-chasing active
mandates, while larger managers tend to be preferable for passive strategies,
smart beta, or illiquid alternatives.
There is, of course, a third way. Centrica’s Ghosh
speaks positively of the “multi-boutique” structure favoured by the likes of
BNY Mellon, Hermes, Natixis, Affiliated Managers Group (AMG), and BNP Paribas.
Often in this model, specialist groups are allowed to operate autonomously but
with the back office support of a larger firm. AMG in particular keeps a low
profile despite its stakes (sometimes minority ones) in smaller, top performing
operations such as AQR, Veritas, and Pantheon.
“The decision is not necessarily between
the behemoth and the boutique—you want a
blend in your portfolio.”
—Tolu Osekita“There is an increasing trend of skilled managers
heading towards multi-boutique set-ups,” Ghosh says. “That way they are direct
owners, but with a certain security. In these set-ups, we feel it is less
likely the firm will suffer a ‘corporate event’ and have a key manager leave.
Happy fund managers—with a stake in the direction of the company—are more
likely to stay.”
It is becoming “more important to have a minimum
size” for asset managers, particularly in the alternatives space, according to Casey
Quirk’s Levi. He points out that some of the largest operators in alternatives
are the big global firms such as BlackRock, PIMCO, and Goldman Sachs, which are
not necessarily well known for those capabilities. As a result of the growing
resources of these companies, “traditional players in the middle ground are
getting squeezed out”, Levi says—echoing Stefan Dunatov’s prediction of the
future shape of the asset management landscape.
Evidence is mounting that the biggest managers are
getting bigger. Aberdeen’s acquisition of Scottish Widows Investment
Partnership has created an £84 billion group (€114 billion), the biggest in the
UK, according to data gathered by the Investment Association, an asset
management trade group.
Separate data from Preqin on private equity, hedge
funds, and unlisted real estate has shown that funds in these areas are on
average getting larger. The bigger, more established names are raising ever
more capital at the expense of smaller or mid-tier players. Blackstone’s Real
Estate Partners VIII fund closed in the first quarter of 2015 having raised a
record $14.5 billion. The previous record of $13.3 billion was also held by
Blackstone.
This dominance by larger groups may be a
reflection of the IBM effect, but whatever the cause it is most certainly not
the whole story.
As SPK’s CEO Peter Hansson explains, “there is an
art” to selecting fund managers—“it’s not a machine that can output who to
invest with.” There are multiple factors to consider, not least the context of
the individual asset owner, and choosing the right fit can take months of work
and hours of meetings.
“The point not to forget is that this industry is
built on greed,” says Dunatov. “People think they should be looking for alpha
and others think they can provide it.”
“People are always chasing skill, whether it is
there or not,” he concludes—and this can apply to any fund manager, boutique or
behemoth.
—Nick Reeve &
Elizabeth Pfeuti
