Jupiter and Merian’s ‘defensive’ match up shows few listed asset managers are safe from becoming a takeover target as the industry grapples with falling assets and enormous pressure from low cost passive giants.
Jupiter stunned the market when it announced on Monday it had agreed to buy Merian. And the M&A news kept on coming as Franklin Templeton confirmed it was buying fellow American rival Legg Mason for $4.5bn (£3.5bn) a day later.
It is no secret that fund groups have seen stiffer competition from passive products. Merian has lost nearly a third of the £31bn assets it had when the business was spun out in June 2018, while Jupiter’s assets tumbled from £48.3bn in 2018 to £45bn toward the end of last year.
Investment Association data shows tracker funds attracted a record £18.1bn from retail investors in 2019, besting the £15bn brought in by active funds that year.
All asset management groups will be considering M&A
“I would hazard that nearly all asset management companies are looking at M&A as a way to deal with fee pressure,” says 7IM senior portfolio manager Peter Sleep.
“The rise of passive and the pronounced outflows from active managers has added urgency to this.”
Jupiter Merian and Franklin Legg Mason are the latest in a string of M&A activity in the funds industry. Last year saw Liontrust acquire Neptune and Premier finalise its merger with Miton. Before that Aberdeen Asset Management joined with Standard Life to create a £670bn behemoth.
“I suspect it’s down to basics,” CWC Research Director Clive Waller, says of the Jupiter Merian tie-up. “Both are pretty small businesses. Just compare with £1.1 trillion at LGIM and $4.5 trillion at Blackrock.”
“I suspect there will be a wave of takeovers and mergers as investment management becomes commoditised and scale becomes critical,” Waller says.
Smaller listed groups are attractive targets
Premier Miton and Liontrust could all make very nice targets for a much larger asset manager like Schroders once their current mergers have bedded down, as could Polar Capital, says Fairview Investing consultant Ben Yearsley.
“All these smaller groups are quite attractive in that sense and the likes of Schroders, for example, have the cash to do it.”
“Probably not a UK one,” he qualifies, “there’s no logical fit there. But then again, was Jupiter Merian a logical fit?”
Gam, which has struggled to rebuild its tarnished brand after the dismissal of star manager Tim Hawyood, has also previously been singled out as a target.
Meanwhile there are several predators lurking about. Deutsche Bank’s retail business DWS has said it is actively looking for businesses to snap up. Before Jupiter snatched up Merian rumours were circulating that it was itself the takeover target of the much bigger US manager Alliance Bernstein.
Yearsley is hoping that one good thing to come from the mega mergers will be a reduction in the number of funds available in the UK market.
“Aberdeen Standard Investments have got three equity income funds in the UK equity income sector. It’s ridiculous.”
Marriage of convenience or defensive play
Yearsley thinks describing the union between Jupiter and Merian as a marriage of convenience “is about right”.
Areas of the business such as sales and marketing where there is likely to be huge overlap provides both firms with “a very easy cost base to strip out”. “There’s going to be lots of sales and marketing people looking for new jobs.”
“I do not think it is convenient if they are haemorrhaging assets,” says Sleep, who thinks the merger is a far more “defensive” move by the fund groups.
One City manager told Portfolio Adviser Merian would likely have been a tough sell. “Who wants a business that is mainly UK retail and does not have a great depth of product and is not particularly scalable?”
Jupiter ended up paying £390m for Merian which was considerably below the £600m TA Associates paid to spin the business out from parent company Old Mutual less than two years ago alongside then chief executive Richard Buxton.
But Tilney managing director Jason Hollands says he can see the logic in the Jupiter Merian deal. Aside from the cost benefit, neither group has a “single, dogmatic house investment process which is a good starting point in terms of the cultural fit” and retaining fund managers.
“While too much scale can be challenging at the product level – for some, but not all, strategies – it is becoming increasingly important at the group level in an industry where margin pressure has increased and where passives have made strong inroads,” says Hollands. “A bigger set of assets across a broader range of capabilities, sitting on a more efficient cost platform should be a sounder business with greater resilience across the market cycle. The deal will also help reduce concentration to a few blockbuster products, which carries key person risk.”
