Analysis: The recent uptick in mergers and acquisitions activity in the asset management industry has sparked debate among experts over potential ramifications for schemes. Fees, innovation and relationships with managers could all be affected.
This month Standard Life and Aberdeen Asset Management cemented their £11bn merger. In May, Henderson Global Investors and Janus Capital merged, while Prudential is set to complete a £2bn tie-up of its life assurance business with subsidiary M&G Investments.*
Market concentration is not good news
Asset managers are unlikely to transfer added value from merger activity to pension fund clients, according to Simon Cohen, chief investment officer at Dalriada Trustees.
“You’re just going to have a greater concentration of managers with less competition, less variety, less choice, so I don’t think it’s a good trend,” Cohen said.
You’re just going to have a greater concentration of managers with less competition, less variety, less choice
Simon Cohen, Dalriada Trustees
The consolidation of asset managers is likely to raise questions over funds’ existing investment mandates.
“It does mean clients looking more closely at the funds that they’re in and consultancy working harder looking at their funds, given what is happening in merger situations. It’s not a great situation,” he said.
“For example, if you had two diversified growth funds, one with Standard Life, one with Aberdeen, would you reconsider having both those DGFs? Because effectively now you’ve got one manager, you’ve got the same manager risk, whereas previously you had two separate managers,” Cohen explained.
Such a situation might however be the exception rather than the rule. A spokesperson from Standard Life Aberdeen said that the new entity has little client overlap, and that investments have been segregated.
The merging of the two bodies is expected to take up to three years.
DC trustees face comms challenge
Asset managers have felt the wrath of investors and regulators over fee transparency. John Belgrove, senior partner at consultancy Aon Hewitt, believes that scale through consolidation represents an opportunity to lower the costs of active management.
He said the industry is sufficiently wide to mitigate the effects of any weakening in market competition for pension schemes, at least on the defined benefit side.
Combining asset managers could result in lower pricing for pension fund clients, owing to transferred synergies and improvements in the financial position of the combined entity.
“From a DB pensions point of view I don’t think it makes a whole heap of difference to trustees,” he said.
Source: Deloitte
However, defined contribution members are more vulnerable to the impact of tie-ups between asset managers, according to Belgrove, and rely on trustees communicating any changes.
“Where a DC member has a product that they might associate with the manager name and they see that change, that can be a bit more disorientating,” he said.
“There’s an extra communications challenge to the individual member that is different to the kind of communications challenge that a board of trustees can take on.”
Consultants should help assess impact
The manager selection process is set to come under scrutiny as asset managers combine.
Justin Preston, head of equity at consultancy bfinance, suggested that the impact of manager consolidation on procurement will vary across asset classes.
Team stability and company structure are contingent on the nature of mergers and acquisitions, and this will feed into a consultant’s analysis of prospective managers, according to Preston.
“If a client comes to us and asks about a particular merger situation, we will help them understand the potential issues that might occur,” he said.
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“If it’s around the integration of the investment team, how they integrate with that office, if there are particular [overlapping] strategies such as two UK equity funds, we will revisit the client’s original decision to invest in each of those.”
A consultant will assess the prospect of independence of the strategies and whether a rationale exists to retain two separate holdings.
“If the teams are being merged, it raises new questions. You’ll be wanting to help the client understand which strategy wins through,” Preston added.
*This article has been updated since publication after news that merger talks between Rathbone Brothers and Smith & Williamson are not continuing
