The UK asset management industry is under pressure as competition and cost pressures continue to trouble its 1,840 authorised firms. Collectively, they manage £7 trillion of assets and employ 50,000 people. Although uncertainty over future EU passporting rights continues to challenge, long term opportunities nevertheless remain with future success favouring bigger firms – full service global brands – alongside smaller targeted managers with unique product offerings.
Until recently, the industry had seen average profit margins of 36%. But fees are being squeezed amid the push for greater transparency and scrutiny by regulators. For active managers, the compliance costs are eroding margins: Markets in Financial Instruments Directive (MiFID II) and Undertakings for Collective Investments in Transferable Securities (UCITS) being the two chief causes.
Meanwhile cheaper passive funds threaten active management business by offering investors similar levels of risk and return as the market, at a lower cost. Technological and data management advancements are further eroding margins, as are commercial costs with firms growing their distribution networks and product manufacturing capabilities overseas.
Market consolidation is therefore inevitable to mitigate risks and remain competitive – illustrated by record M&A activity across the industry. Last October, Anglo-Australian Henderson announced a £4.7bn merger with US rival Janus. This deal ‘of equals’ is anticipated to deliver around $110m in cost savings. More recently, the £11bn mega-merger announced between Standard Life and Aberdeen Asset Management (AAM) will combine £660bn in assets.
Standard’s virtually nil-premium proposal for taking over AAM signals fee pressure, highlighting the importance of reducing costs and achieving scale. Overall deal synergies are expected to deliver annual cost savings of £200m.
Further consolidation will be fuelled by economies of scale: the growing regulatory burden – acute for smaller asset managers – will increase compliance costs, further pressurising margins and precipitating more mergers.
Asset managers will also evolve, reaching into areas traditionally dominated by banks: primary lending, secondary debt market trading including distressed and nonperforming loans, primary securitisations and off-balance sheet financing.
Meanwhile the core asset management business should benefit from demographic trends: a billion more middle class consumers are expected by 2020 who will accumulate wealth and save for retirement. And as the world ages, retirement and healthcare costs will grow so asset management clients will need to save more to pay for it.
Other key drivers include: a surge in pension funds allied with the increase of defined contribution (DC) pension schemes, more high net worth individuals, and the expansion of sovereign wealth funds. Meanwhile economic conditions are favourable: low interest rates and sustained GDP growth, underpinned by growing urbanisation and cross-border trade.
But Brexit overshadows everything. The UK’s departure from the EU presents assorted risks for asset managers whose operations depend on EU market access: current rules would mean a loss of managing and marketing passporting rights into the EU.
The competitive landscape is also changing. Disruption could come from social media or technology companies, potentially combining their reach and influence with banking alliances to provide compelling asset management propositions. Silicon Valley’s Tesla, which recently overtook General Motors to become the biggest US car maker, shows how quickly cutting-edge technology can make a huge impact.
Technological progress is increasingly required in asset management to meet customer and regulator demand, creating added fee pressure. Higher costs and demand for lower fees will also intensify the battle for customer relationships: likely to be a continuing theme for the UK asset management industry. For most, generating sufficient scale may well be the answer.
For those who achieve the right balance – while continuing to deliver consistent returns, increased transparency and strong customer service – the outlook is positive.