One trend that has been persistent, protracted and powerful in the Asset Management industry is consolidation.
And it’s not just the mega deals. Mergers, acquisitions and restructurings have been an ever present feature, on both buy-side and sell-side, at all points on the size spectrum. Recent names in the headlines include Franklin Templeton, Liontrust, Crux, Generali, Invesco, Rathbones, GAM, Brewin Dolphin, Numis and many more.
It is driven by a number of factors – increasing lower cost competition from ETFs and passive, ever increasing compliance burdens, strategic synergies, or just looking to “fill the gap” in the investment offering.
And consolidation means concentration – the big getting bigger.
As an example, BlackRock in the UK, have doubled their market share since 2013 going from 8% to 16% of total net assets in the market.
This corporate activity is “super-charging” the growth in some funds way ahead of market moves or routine asset gathering. This has implications for what the fund managers may hold in their portfolios.
Consolidation in the Asset Management industry typically leads to mergers of funds. It can also mean that what had been hitherto different funds, now being managed to the same common single model portfolio. The net result is a greater amount of assets targeting a smaller number of stocks.
Regulators and risk managers place huge emphasis on fund liquidity. This involves looking at issues such how much exposure there may be to any one stock, whether any of the holdings are particularly illiquid or how long it might take to sell the whole fund.
These are all important issues as they can provide “red flags” to any potential risks in the fund for the investors.
But it also has implications for the contents of the fund. Basically as funds grow, the size of stock they can consider, and the minimum size of any deal they can trade also grow. Depending on the size of the funds, perhaps only larger, more liquid stocks can be considered.
Does this matter for investor choice? Probably.
In the UK for example fund managers were often significant investors in Investment Trusts, but as fund size has grown, their ability to invest in trusts and not break their liquidity rules (such as not owning more than 10% of any entity) has diminished. As a result fund ownership of investment trusts has fallen dramatically and many trusts now sit at multi-year discounts reflecting the absence of a significant buyer.
This can apply to stocks and sectors in the same way.
For the investor a risk from this frantic fund activity is that diversity in fund contents declines, and that there is a “sameness” about what’s available.
Even today we can see a huge overlap in fund holdings which means that investor choice is compromised. The table below shows three of the major active funds investing in Eurozone equities being sold here in Ireland, – note the very high level of common positions.
| Fund A | Fund B | Fund C |
| LVMH | ASML | ASML |
| ASML | LVMH | LVMH |
| Total | SAP | Total |
| Sanofi | Schneider | Siemens |
| Deutsche Tel | L’Oreal | Allianz |
| SAP | BMW | Sanofi |
| Air Liquide | Dassault | SAP |
| L’Oreal | Allianz | L’Oreal |
| Allianz | Infineon | BNP |
| AXA | Essilor | Schneider |
And these are all active funds, with individual managers making their own “calls” and stressing their ability to take off-benchmark positions. Yet the outcome doesn’t seem to offer much choice to the investor.
This matters because consolidation in Asset Management looks to continue at pace.
According to the highly regarded PWC industry survey, nearly three-quarters of all asset managers are considering consolidation of some kind.
One in six of all asset and wealth managers globally are expected to be swallowed up by 2027!
And as regards concentration, today the top ten asset managers control around 42% of mutual fund assets. By 2027, this moves to over 50%!
It’s not that clear that all this industry consolidation will be in investors’ interests.
Tradewinds 