Fierce competition and pressure to offer innovative investment products with lower fees have been the drivers behind much of the consolidation within the asset management industry.
Now the rumour-mill is full of talk about a potential merger between UK investment powerhouse, Invesco, and State Street’s asset management business, State Street Global Advisors.
Reports first surfaced in the Wall Street Journal on 16 September, suggesting that talks were in the very early stages and may not result in a deal being struck between the two companies.
However, this hasn’t stopped the speculation from hitting share prices or discussions about what a merger between the two will look like and how this will impact the wider industry.
At the end of last week, Invesco’s share price had risen almost 5%, while State Street had fallen 3%.
“Giant fund management groups are a mixed blessing for the industry. They bring with them the resources to be able to conduct significant additional research as well as the potential for more compliance and risk monitoring – which is important in the current climate,” says independent wealth consultant Adrian Lowcock. “However, at the same time scale can mean that large asset managers are too big and not able to offer access to more niche areas of the markets.”
There have been other significant deals struck between big financial names. Last year, for example, Morgan Stanley snapped up Eaton Vance for $7bn, and Franklin Templeton bought Legg Mason for around $4.5bn.
The rumoured deal with State Street Global Advisors also isn’t the first for Invesco, which bought OppenheimerFunds and the exchange traded funds arm of Guggenheim Investments in 2018 and 2017, respectively.
Middle space has been challenging
“The market has been consolidating for some time and the challenging area has been in the middle space, sort of the worst of both worlds, so it isn’t surprising that mega mergers are happening,” Lowcock adds. “In addition, the giant fund management groups are really beginning to dominate the market, while smaller asset managers are able to carve out their own specialisation and brand.”
Some of the past mega-deals, such as those between Franklin Templeton and Legg Mason and Morgan Stanley and Eaton Vance, have had a positive outcome. In these cases, it was reported that both companies were able to slash some 2% of expenses from the combined revenues.
For fund buyers and end investors, however, it remains to be seen whether such large deals can really offer innovative products with low price tags, or if by snapping up other firms, competitive solutions could disappear from the market.
Downward pressure on prices likely to be small
“Any tie-up between State Street and Invesco would create an asset management behemoth that would straddle both active and passive strategies,” explains AJ Bell head of investment analysis Laith Khalaf. “In theory, the combination of two already large asset managers should create some product consolidation and lower fees thanks to economies of scale.
“However, any downward pressure on prices across the industry is likely to be small, particularly in plain vanilla passive products where charges from big providers are already extremely low, and there is a law of diminishing returns from engaging in any sort of price war.”
Fairview Investing director Ben Yearsley adds: “I don’t think it really impacts UK fund buyers – partly as Invesco isn’t massively loved by UK advisers. We have got used to mega-mergers, most are bad for shareholders but have little impact on fund buyers.”
