MiFID Rules May Spur Money Manager Deals in Quest for SurvivalBy
Regulations are increasing costs just as ETFs steal business
Allianz Global Investors CIO says it’s driving consolidation
The biggest overhaul in a decade to the way fund managers are regulated in Europe could hasten mergers and acquisitions among companies already trying to fend off competition from cheaper products.
The asset management industry has seen some of the biggest deals for years as traditional "active" firms unite against the popularity of "passive" funds that track indexes. The European Union’s revision of the Markets in Financial Instruments Directive, or MiFID II, now threatens to increase costs and shrink profit margins as companies have to pay banks for the analyst research used to select investments.
"It’s one of the drivers we’ve seen," said David Logan, head of distribution at BMO Global Asset Management. The firm was involved in one of the industry’s biggest mergers of late when Canada’s Bank of Montreal acquired the U.K.’s F&C Asset Management Plc in 2014. “Scale is becoming much more important again. We are in a period of consolidation and it will continue for a bit longer."
These are turbulent times for an area of the financial services industry that had avoided the kind of regulatory upheaval seen at banks and insurers in recent years. For many in the old-fashioned business of stock picking, it’s now the existential question of how to adapt and protect profitability.
French insurer Axa SA is looking at options for its European asset management business, according to people familiar with the matter. It could be a merger or joint venture, the people said, asking not to be identified because the details aren’t public.
In two of the biggest transactions to complete this year, Janus Capital Group Inc. and Henderson Group Plc formed an asset manager with a stock market value of $6.6 billion, while Standard Life Plc combined with Aberdeen Asset Management Plc to form the U.K’s largest active money manager. The new company is valued at 12 billion pounds ($16.3 billion).
This week, Aberdeen Standard Investments said it would shoulder the cost of sourcing research rather than passing it on to customers when MiFID II starts in January. It talked of the “immediate scale benefits” resulting from the merger of Scotland’s two biggest money managers.
Other costs from the new regulations include the expansion of compliance departments while banks and insurers may end up reducing the number of fund companies they deal with as firms have to document transactions in more detail.
Then there are expenses from new technology. That will amount to $2.1 billion in 2017, according to an estimate covering 40 investment banks and 400 asset managers by Expand, part of the Boston Consulting Group, and IHS Markit.
Such new costs will “massively” drive consolidation, Andreas Utermann, chief executive and chief investment officer at Allianz Global Investors, said in an interview. It creates a double-whammy with the threat from exchange-traded funds, which track indexes.
“I would expect to see that continue,” Utermann, who is responsible for about 500 billion euros ($597 billion) of assets, told Bloomberg Television this week. “It’s regulation that increases the cost base of asset management companies, it’s the increased cost of distribution and it’s the competition from ETFs which puts huge pressure on margins.”
For Stephen Jones, investment chief at Edinburgh-based Kames Capital, the theme in the industry remains “active managers getting together to face the ongoing asset-gathering in passive funds” rather than regulation driving takeovers.
A survey of asset managers by State Street Corp. in June showed 75 percent of respondents said complex regulation will make it harder for smaller managers to survive on their own.
UBS Group AG analysts said in a report this month that MiFID II will have a “substantial” impact on profits at smaller U.K. asset managers, and scale benefits become “fleetingly marginal” for those managing more than 30 billion pounds. Schroders Plc is best placed for consolidation because it has excess capital, but otherwise the rules will have a limited effect because the benefits of scale “diminish rapidly” for larger companies, they argued.
Consolidation is “one of the obvious reactions” to the increasing costs of compliance and regulations, said Logan, who was F&C’s chief financial officer prior to the tie-up with BMO. Mergers can create “larger organizations that are more able to carry the cost of that change and to spread those costs over a wider business and a larger book,” he said.
— With assistance by Francine Lacqua, and Ruth David