ANALYSIS: The big get bigger

FishThe world’s top three asset managers have extended their lead. To compete, others are merging.

Recent decades have seen inequality rise in the developed world. Political commentators routinely discuss ‘the 1%’, the global elite whose wealth has multiplied while average wage growth has slowed to a crawl. No wonder that economist Thomas Piketty’s book, Capital in the Twenty-First Century, which sought to explain why wealth has become increasingly concentrated, became an unlikely bestseller. There are even plans to make it into a documentary film.

The asset management world has itself been subject to similar forces. For some years, the largest managers have succeeded in increasing their asset base at a faster rate than their smaller peers, a trend which, over time, is leading to a concentration of wealth among the biggest firms.

The latest report by P&I/Willis Towers Watson on the world’s largest asset managers shows that, in 2016, the trend appeared to accelerate, at least for the top three managers. These firms are the asset management ‘1%’. How can smaller firms compete against these increasingly dominant players? The answer might be in mergers.

Growing in size
The top three managers by assets, BlackRock, Vanguard Group and State Street Global Advisors, increased their asset base by more than 10% each during 2016. Given their size, this was significant growth.

For BlackRock, the gain in 2016 was about half a trillion dollars – roughly the GDP of Sweden. By the end of the year, the firm controlled $5.1 trillion (€4.3 trillion). The increase in its assets was partly due to investment inflows but also the result of market gains.

For some years, BlackRock’s number-one position has seemed unassailable, but its lead actually shortened last year. That was thanks to remarkable growth from Vanguard Group, which ended the year with nearly $566 billion more under its management than it had at the start of 2016. The growth, equivalent to 17% of its asset base, means Vanguard controlled nearly $4 trillion at the end of 2016. BlackRock is still comfortably in the lead, but Vanguard closed the gap. In third place,

State Street Global Advisors increased its asset base by $223 billion in 2016 to bring its total to just under $2.5 trillion.

The performance of these top managers should not be underestimated. Together, they managed to increase their asset base by about $1.3 trillion over the course of 2016. For perspective, that is equivalent to the assets of the 11th-largest manager in the ranking, Prudential Financial.

If current trends continue, the lead of the top three will only grow – leading to more concentration of wealth. For comparison, the top 500 asset managers in the list increased their assets by an average of 6% over the course of 2016. The top three easily beat the average growth rate.

Better together
Concentration of wealth has also occurred when asset managers have joined together through takeovers and mergers. Several reasons are commonly given for why asset managers might seek to merge in the current environment.

One argument goes that, since the cost of complying with regulation is increasing, companies should merge to create larger entities that are better able to manage compliance duties efficiently. Another claim is that, with increasing competition from passive funds, active managers need to create bigger, stronger brands.

Whatever the rationale, there have been several high-profile mergers in the past few years. Although the P&I/Willis Towers Watson table lists them separately, New York Life and Candriam are now a merged entity. Taken together, the company controls $612 billion and would appear in 38th place in the ranking if their assets were combined. The constituent businesses of Janus Henderson, meanwhile, together control $315 billion and would appear in 57th place if they were combined in the ranking.

Another high-profile deal was the merger of Aberdeen Asset Management and Standard Life Investments, announced in 2017. Taken together, these firms control $690 billion, according to the table, which would put them in 32nd place.

Amundi’s acquisition of Pioneer Investments, however, was the biggest merger in terms of assets. Amundi, which already controlled more than $1 trillion, has increased its total to $1.4 trillion as a result of the deal, which was completed in July 2017. This sum would be enough to propel the firm into tenth place in the ranking if the two firms’ assets were bundled together in the analysis.

As a result, Amundi would overtake Deutsche Bank as the world’s third-largest Europe-based asset manager behind Allianz Global Investors (in fourth) and Axa (in eighth).

Going down
Of course, 2016 was not a good year for everyone. Emerging market equities, for example, did not perform well during the year, leading to market losses and outflows for firms with a large allocation to these assets.

Aberdeen Asset Management had a particularly bad year on this measure, with a 19% fall in its managed assets during 2016. The decline caused the firm to fall from 44th position in the 2015 ranking to 54th in the 2016 table.

The company that recently merged with Aberdeen, Standard Life, also had a bad year in 2016. It suffered a 9% decline in its asset base, which sank the firm from 50th to 55th position.

HSBC, another firm with a reputation for a strong emerging market offering, suffered a 7% decline in its assets. Franklin Templeton, meanwhile, witnessed a 6% fall in its asset base over the same period.

Staying alive
A concentration of assets is not only happening among the active asset managers. Earlier this year, Invesco, which increased its assets by 5% last year to $813 billion, acquired Source, an exchange-traded fund (ETF) provider. Source will sit alongside Invesco’s existing ETF business, PowerShares.

Legal & General Investment Management, the largest UK-based manager with $1.1 trillion, also entered the ETF market by buying the European ETF platform of ETF Securities, a business known as Canvas. The deal followed the sale of ETF Securities’ European commodity, currency and short and leveraged division to WisdomTree.

Consolidation among passive fund providers ought to be no surprise. There is a ferocious price war underway in the ETF and index fund market. To compete, companies need to accumulate as large an asset pool as they can to realise economies of scale.

For passive managers, as much as their active cousins, bigger is better.

©2017 funds europe