Is your money in safe hands?
How we’re keeping pace with disruptors to help safeguard portfolios
We examine the impact that an increase in regulation and the emergence of competition from passive investing has had on the markets.
Current business and market cycles have been characterised by an increase in regulation and the emergence of disruptors that are challenging the incumbents and reshaping the new environment. This reality is common for most sectors and the fund management industry is no exception. Since the global financial crisis, the increased regulation and the competition from passive investing has forced big asset managers as well as boutiques to rethink their strategy and adapt to the new environment.
The result has been a wave of consolidation that has been ongoing over the last few years. The latest manifestation is the acquisition of Eaton Vance by Morgan Stanley that created the 23rd biggest asset manager in the United States with $714bn of assets under management, according to Morningstar. What does this rapid change in players and products mean for our portfolios? And how do we, at Barclays, make sure that we do everything we can to keep our clients’ money safe?
The new reality
While asset managers have enjoyed an increase in assets under management over the last decade helped by strong market returns, challenges facing the industry have been growing as well. Fees are under pressure as investors diversify towards lower fee products while costs are also increasing as we invest more in technology and data. These aspects have pushed asset managers to adapt their strategy by either consolidating or differentiating their offering.
Adapting to the new environment
Consolidation has been a clear trend over the recent years as firms seek scale and synergies in order to increase revenues and reduce costs. In fact, the asset management industry remains one of the most fragmented industries globally after capital goods (also referred to as the industrials sector), according to a report published by Morgan Stanley. The same report highlights that the top 10 firms have just 35% of market share (Figure 1), while for more concentrated industries this number is usually closer to 75%.
Deals have spread across big asset managers – such as Aberdeen Asset Management and Standard Life, Franklin Resources and Legg Mason, and more recently, Morgan Stanley and Eaton Vance – or more focused in specific markets like Jupiter Fund Management and Merian. Recent rumours are highlighting a potential deal between Invesco and Janus Henderson as activist investor Nelson Peltz’s hedge fund has built a stake of nearly 10% in both companies. He played a key role in the Franklin Resources/Legg Mason deal.
Some other asset managers have adopted the multi-boutique approach in acquiring specialist teams or boutiques and allowing them to operate independently. This has been the approach adopted by Natixis for instance or Polar Capital.
Figure 1 – The asset management industry is still highly fragmented
Finally, specialism in a particular asset class or product type, like Environmental, Social and Governance (ESG) for instance, has been a strategy adopted by some asset managers. Differentiation by performance or by product type has been rewarded by an increase in assets under management over the last few years.
As the fund management industry evolves with bigger players and new products, we ask ourselves what the implication of this change is to our portfolios and our clients? We think that the new environment is actually an opportunity, as it is driving more innovation and higher quality.
In fact, the emergence of passive investing over the past few years has increased the quality of active management, as it pushed fund managers to adopt a more pragmatic approach to the products they offer. Performance has become an even more important consideration and a major differentiator against other competitors, including passive. Actually, fund managers that have been able to deliver consistent outperformance have seen their assets under management increase substantially. We use a lot of these managers in our portfolios and they constitute our core holdings that are complemented by a passive allocation.
Innovation in the product offering is another consequence of the new environment. Asset managers have become very quick in spotting trends in demand and in offering appropriate products. The rise in ESG and impact funds is a clear illustration of this. The number of funds addressing environmental and social challenges has increased substantially offering us more tools and ways to approach these themes in our portfolios.
Having said that, as portfolio managers, we are also mindful of the fact that these changes in the fund management landscape have important consequences on products and structures especially of the firms that are consolidating. For that, we rely on good investment and operational due diligence to make sure that consolidations and synergies don’t come at the expense of quality.
Conclusion – what it means for us
This evolution in the funds industry is bringing changes but the opportunity is clear. The trend is towards more innovation and quality, which makes the universe for both active and passive investments increasingly interesting. Having said that, these investments are closely monitored by us from an operational and investment due diligence, and a portfolio management, perspective. We analyse, select and monitor each of our holdings to make sure that, at any point in time, our clients’ money is always in safe hands.
Things to consider
The value of investments can fall as well as rise. You may get back less than what you originally invested.
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