25th January 2011
The Retail Distribution Review is likely to shake up the asset management industry. Advisers are moving away from selecting funds to being ‘financial planners'. As such, the use of passive funds has grown significantly, which creates some challenges for the active management industry.
Facing a more competitive landscape, consolidation has been a much-mooted solution and mergers are increasingly been seen across the industry. But what is the impact for unitholders?
This FT Adviser article outlines how the market is changing. Active fund managers face pressure on costs from the increasing penetration of passive investment groups and need to do what they can to be more competitive.
In each case, the rationale has been slightly different. Thames River and Rensburg were successful boutiques, but the economic and regulatory climate was increasingly unkind to smaller businesses. Gartmore was a distressed seller after a number of top managers left.
Merger and acquisition activity will always create disruption. Integrating two cultures is unlikely to progress entirely smoothly even if the merger is an ‘arm's length' one, leaving the original business in tact. The culture of a boutique fund manager, in particular, can be a unique asset.
Equally, funds will merge where there is a cross over and fund managers may find themselves running considerably more money. The access to broader distribution capabilities has been an important rationale behind the Thames River and Rensburg mergers. This may be good for the fund management groups themselves, but it may not be what investors originally bought into.
Performance can suffer, but in many cases – if the fund managers remain the same – it doesn't. For example, in the Henderson New Star merger, funds such as Richard Pease's European Growth fund and James Gledhill's High Yield Monthly Income fund maintained their long-term track records. A mass exodus of assets can make a fund difficult to manage, particularly in more illiquid markets, but this is not inevitable as this Morningstar analysis shows.
And there can be real advantages to fund manager consolidation. For example, in a distressed sale, where a group is at risk of losing fund managers, a merger can offer the wherewithal to tie in talent. It can also mean that underperforming funds are merged with better-performing funds at the wider group. In this way it should be good for unitholders that have clung on through turbulent times. This Telegraph article on the Gartmore/Henderson merger shows the value fund selectors place on stability: . Of course, the same is true for boutique fund managers, who will have access to a broader administrative infrastructure.
Investors may have to get used to fund manager mergers. History suggests that they are not necessarily bad for unitholders, particularly if they bring increased stability for the group in question.