IIMI, the boutique asset management think tank, has today published a paper calling for a more proportionate approach to regulation in response to increasing consolidation in the sector, which many of its members believe is reducing competition and investor choice. The full paper, entitled “M&A in Asset Management: Is it strangling boutiques?”, can be found here.
The paper explores the drivers behind the ongoing M&A activity and questions whether decisive action needs to be taken at a governmental or regulatory level. As part of this analysis into M&A trends within the industry, IIIMI spoke to a number of its diverse boutique asset manager members about the impact consolidation was having.
Drivers for consolidation
Asset management M&A has been riding high over the last few years. According to data from Mercer Capital, both deal volume and deal count in 2018 were at their highest levels since 20091. Consolidation at large asset managers has been driven by a combination of factors, including the reallocation of funds by investors into cheaper passive products, and a dramatic increase in managers’ costs. Regulations in the EU have been particularly intense for asset managers, with rules such as AIFMD, MiFID II, EMIR, UCITS V, GDPR and PRIIPs all collectively affecting fund manager margins. For many firms struggling under the weight of these complex regulations, consolidation is often seen as the best option.
It has also been noted that there are “second order” barriers. Within the UK discretionary wealth management and IFA sector, there has been huge consolidation as firms deal with regulatory complexity and look to achieve economies of scale. As a result, they advise much larger pools of capital which must be allocated to managers who can accept sizeable investments, namely those with higher capacity. The biggest managers are typically the ones who can onboard the larger flows, but smaller funds – or those that are disciplined about capacity and the liquidity they offer – cannot accept these outsized allocations. Again, this is widening the gulf between big and small.
The performance case for boutiques
If investors are unable to access as many SME asset managers, they may struggle to obtain portfolio diversification through wider exposures to niche strategies, which can also have a negative impact on returns. One IIMI member noted: “As large asset managers get bigger, performance sometimes gets worse as it is not as easy to move in and out of trades. Even if investors are paying lower fees at these large fund managers, they might not be getting the performance they deserve. Boutique asset managers can give investors exposure to niche or specialised products, which is much harder to do at larger fund managers”. Furthermore, boutique asset managers have a proven track record of outperformance, both against their largest rivals and index trackers.
“It is clear there is widespread concern among our members that continued consolidation in the asset management industry will force investors to allocate into only the largest, dominant asset managers – ultimately depriving them of choice and potentially even returns. If the UK is to have a competitive asset management industry moving forward, IIMI strongly recommends that a more proportionate approach to regulation would be a good starting point to enable boutique managers to flourish alongside their larger peers.
“These new regulatory changes are a unique opportunity for asset managers to upgrade their business model, their FX operational processes and improve efficiency to reduce investment costs and improve fund performance. That can only be good for building strong business relationships.”Jamie Carter, Chairman of IIMI