The Misery of Managing Other People's Money
Standard Life Plc has just published the prospectus for its planned merger with Aberdeen Asset Management Plc. As well as the usual boilerplate language on the potential pitfalls from changes in the market, regulatory and tax environments, the section on "Risk Factors" highlights the challenges old-school money managers face as they struggle to maintain market share and fees amid the rise of low-cost exchange-traded funds and index-tracking investments.
The Scottish deal will create the sixth-biggest fund manager in Europe and the second-largest active manager in the region with 670 billion pounds ($870 billion) of assets. The move is a response to the brutal reduction in how much you can get away with charging for managing other people's money.
The language used in the prospectus is tantamount to an admission of failure on the part of the active-management crowd (emphasis mine):
Growth in passively-run index trackers continues to gain pace, propelled by the U.S. market and the inability of many active strategies to consistently outperform their benchmarks, net of fees. Market access to passive investing, including strategies driven by smart beta, robo advice, artificial intelligence and machine learning, is cheap and ubiquitous through passive funds and exchange-traded products and therefore it poses a risk.
The prospectus also stresses another hazard facing the money-management industry -- a shift in the customer base amid what Standard Life calls "the democratization of financial risk," whereby individuals are increasingly responsible for building their own pension pots:
Although historically the Standard Life Group’s and Aberdeen Group’s clients have consisted predominantly of pension fund clients, government authorities, insurance companies, private banks and financial advisers, there has been an increase in individuals as clients.
The problem with that shift is the capriciousness of individual investors, as opposed to what my Bloomberg Intelligence colleague Alison Williams calls the "stickier" tendency of institutional assets. In the following chart, note the relative steadiness of the light red line which tracks just institutional cash flows, compared with the wilder swings of the darker red line for overall flows including investments by individuals.
Maintaining a large investment organization with its accompanying fixed costs is hard enough in a world of low or negative interest rates and yields, and with equity market volatility all but absent. When your customer base is becoming ever more fickle, something's got to give.
Standard Life claims that the merged entity (which will trade under the snappy name Standard Life Aberdeen -- no fees wasted there on a re-branding exercise) will achieve recurring cost savings of 200 million pounds a year, in part by eliminating almost 10 percent of the workforce in the coming three years.
Jeff Gundlach of Doubleline Capital told the Sohn Investment Conference this week that "passive investing is just a myth," since even the constituents of the Standard & Poor's 500 index are chosen by a committee. Even so, the revolution on fees fomented by passive strategies and their ETF brethren is here to stay.
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