Mr Mansfeld adds that the growing trend towards specialist mandates will lead small to medium-sized asset managers to downsize and specialise their investment operations.
However, despite predicting a proliferation of specialist players, he believes that for the foreseeable future there will be room for a range of business models – large and small, multi-asset and boutique – to operate successfully.
That everyone will be a winner in the future is a view shared by industry practitioners representing both large and small organisations.
The future shape of the global asset management industry is just one of the broad issues up for discussion at the forthcoming Fund Forum conference in Monaco in July.
Robert Parker, vice-chairman of Credit Suisse Asset Management (CSAM), says: “A few large multi-asset firms will continue to grow while we will continue to see vibrant specialist players. It would be an unhealthy industry if it were dominated by a few very large scale multi-asset firms. Likewise it would be a chaotic industry if it was incredibly fragmented into tens of thousands of boutiques.”
He does not expect such a level of fragmentation to occur. As new specialist operators emerge, others will be taken over and some will go bankrupt.
He contends that there are advantages in being a multi-asset firm in terms of developing and managing the business. For instance, he says large firms can leverage their research platforms for the benefit of clients with different investment portfolios.
“You can describe all sorts of research linkages. For instance, credit research is fusing with equity research, while fixed income research is also relevant to real estate investment.”
Peter Branner, managing director of Luxembourg-based multi-managers Ikano Funds, concurs with the view that large investment firms offer intrinsic advantages: “We interview and rank more than 100 asset managers every year and we believe that specialists are better than generalists in any given asset class. However, a company with investment professionals in different asset classes can benefit from cross-fertilisation of expertise and ideas. For example, an equity team can benefit from a formal exchange of views with the analysts and portfolio managers on a high yield bond team”.
CSAM’s Mr Parker maintains that diversity of product is critical to the risk management of a firm, since the cyclical nature of markets renders it difficult at times to make money in certain asset classes.
Internal specialists
But he accepts the claims of boutique firms to be better in the asset classes they specialise in, while pointing out that multi-asset organisations such as CSAM which have created specialist in-house investment teams face a tough balancing act in making a success of this structure.
“You have to run the specialist groups almost as separate businesses so you are getting the advantages of specialisation but within a multi-asset firm. At the same time, you have to get each specialist group working together to exploit common resources,” he says.
Richard Lacaille, European chief investment officer at State Street Global Advisors, says that while the growth of niche players will continue, the important question is how much it will cost investors in terms of the search and related corporate governance process to find the managers who offer high alpha products.
Lacaille: ‘if asset owners have enormous resources to find managers, then you could see a proliferation of micro-managers’
He says: “If asset owners have got enormous resources to find managers, then you can envisage a proliferation of micro-managers. Customers won’t want this cost to be too high because then it impacts on returns. This factor might serve to limit fragmentation.”
He adds that multi-asset managers can deliver alpha provided they obey the “iron rule” of not exceeding the capacity of their research. If they go beyond their capacity limit, management fees start to rise.
John Cleary, chief investment officer at Standard Asset Management, contends that fragmentation of the asset management industry will continue simply because large firms “encourage mediocrity”.
Cleary: ‘if you outperform the market on the upside, you’re going to underperform it on the downside’
He argues: “They are focused on gathering assets and want to avoid surprises. They will probably lower their tracking error to the benchmark so they cannot be accused of underperforming. As a consequence, managers who achieve the best performance either leave to set up their own operation or join a specialist boutique.
Mr Cleary believes that in order to survive and thrive, more and more specialist firms are going to concentrate on “manufacturing” product which will be distributed through funds of funds or private banks.
He says: “We are just manufacturers; our clients are distributors and we need to stay ahead of the game, performance-wise, in order to retain that client base.”
But achieving consistently high performance is not as easy as some fund managers, multi-asset or specialist, might think.
Mr Cleary contends: “What has shown up in the last few years is that taking risk and being the best returning fund is not a no-brainer. You need a unique combination of focus, expertise, talent and luck to a certain degree.
“In essence, if you outperform the market on the upside, you can be sure that you are going to underperform it on the downside. Asset management tends to be a symmetrical business, particularly if it is benchmarked.
“Only a handful of managers have achieved consistent outperformance of their benchmark. The problem is the more successful they are, the way they achieve the high performance is highlighted for others to follow, leading to opportunities for return being arbitraged away. This is happening in the hedge fund industry.”
Hesitant buying
The lack of real consolidation in the global asset management industry has surprised some commentators.
Hendrik du Toit, chief executive officer of Investec Asset Management, says: “Consolidation is happening at the distribution level and in the back office. The consultants are also consolidating. But investment firms are not buying others in as big a way as predicted, possibly because many asset management firms are owned by large financial organisations.
Du Toit: ‘this industry has still a big job to do in terms of cost elimination’
“The answer is not as simple as we all expected. The ultimate goal of consolidation is to strip out cost and that has not happened yet. This industry has still a big job to do in terms of cost elimination.”
Mr Mansfeld of Union Investment says: “We have not seen much consolidation in the front office areas of brand and product range. Everyone expected consolidation to happen. But the market is fragmented in that fund managers offer the same products just because they work in different jurisdictions.
“I cannot identify a clear trend towards consolidation. I do not see medium-sized players simply disappearing from the scene. I do not see grand scale M&A.”
Mr Branner of Ikano Funds comments that consolidation tends to happen in waves.
He says: “In the US and to a lesser extent in Europe, larger financial institutions are buying into boutique managers to grow their business. Previously, such acquisitions were often followed by a merger of the investment teams with the result that many professionals were left without a job or that many of the key people would simply leave because of internal politics.
“Today consolidations are carried out more smartly and with respect for sub-brands and investment teams. The buyers have learned that the winning model is not necessarily to merge investment teams, but rather benefit from economies of scale in administrative functions, client service and distribution.”
Julian Tregoning, a director of Mellon Europe, believes that consolidation will continue in Europe because large multi-asset organisations will always seek to buy specialist firms.
He adds: “If you are in the middle of the pack it is quite difficult to know what your optimum operating model is, let alone what your vision and mission is. So for these reasons you might decide to sell.
“At the small end, an entrepreneur who set up a boutique might want to retire and sell out. Also the burden of regulation nowadays is such that the need to invest to systems is great. Smaller firms might throw in the towel because they do not have the ability to continue.”
FUND FORUM INTERNATIONAL 2005
July 5-8, Monaco, organised by ICBI
