Asset Managers See Mergers as Key to Survival, State Street Says

  • Survey shows passive fund competition will force more deals
  • State Street says optimisim among firms may be ‘misplaced’

Asset managers expect to see more competitors merge at a fast pace over the next five years as firms seek to compete with cheaper passive funds and pay for costly regulation, a State Street survey showed.

Some 76 percent of asset managers in the survey said competition from Exchange Traded Funds and other index strategies will force more consolidation. Around 75 percent said complex regulation will make it harder for smaller managers to survive on their own, while 76 percent see M&A as an “essential strategy” to keep up with digital changes.

“Asset managers are under pressure to respond to investor demands for more global diversification and better pricing,” the financial services company wrote in the report. “Incumbents should be prepared to reshape their business models if they want to compete a decade from now.”

The industry has already seen the strongest bout of M&A activity in at least a decade during 2015-2016 as competitors joined forces to manage the structural changes that threaten profit margins. The flurry of deals culminated in Standard Life Plc’s $5.1 billion merger with Aberdeen Asset Management Plc which was approved by shareholders last week.

More than 80 percent of investment firms in the survey said companies will need to improve distribution and offer a bigger range of investments to keep up with investor demand, according to the survey. Some 61 percent said they had already started to broaden their product offerings.

Despite the challenges, 58 percent said they are confident they will meet their growth targets over the next 12 months and 75 percent said the same over five years. State Street said the “optimism might be misplaced,” as the biggest perceived driver of growth in the survey was the economic outlook.

“This suggest a dangerous assumption that future economic performance alone will easily translate into prosperity for the investment industry,” State Street said. “Investors need to consider that the future might look very different from the past.”

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