AMG chief slams asset management industry deal wave

Written by IhebQld

Consolidation in the asset management industry does not benefit investors, particularly in active management, according to the chief executive of Affiliated Managers Group.

The industry has experienced a wave of deals in recent years as fund managers grapple with a rapidly changing landscape of squeezed margins and fierce competition from cheap passive products offered by US giants such as BlackRock and Vanguard.

“You cannot consolidate talent,” AMG’s chief executive Jay Horgen told the Financial Times. “We don’t think consolidation is good for clients, we don’t think it’s good for partners of the firm, and we don’t think it’s good for employees at the firm. I’m not sure who it’s good for ultimately.”

He added: “You might be creating value for shareholders at the expense of employees, partners and clients.”

AMG, which has $691bn under management, operates a partnership model that buys stakes in fund managers — including groups such as AQR, and Parnassus — but allows them to operate independently.

Dealmaking in the industry hit a historic high in 2021 before levelling out to pre-pandemic levels in the first half of this year, according to consultants PwC. That still meant an estimated 25,000 deals were struck in the space of six months.

But some of the highest-profile deals of recent years — such as the mergers of Janus Capital and Henderson Group, and Aberdeen Asset Management and Standard Life (now known as Abrdn) — have been plagued by investor outflows while the companies have struggled to grow without acquisitions.

While scale might seem appealing for managers trying to find their place in an industry dominated by the likes of BlackRock, a wide waterfront approach to investing runs counter to the ethos of active management, Horgen said, leading firms to lose focus and investors to question the value of active management.

“The concept of consolidation is an industrial concept, it’s not really a service industry, intellectual property-based concept . . . Sure, you can have an everything-to-everyone approach to asset management, and have one of everything, but that doesn’t mean it’s high quality,” he said.

“When things are completely commoditised, maybe there’s an opportunity to build scale and consolidate. But by that time you’re asking yourself, what’s the value of active management if it can be so easily commoditised?”

As many in the industry have rushed to strike deals, the number of independent investment firms has also boomed. The number of investment advisory firms registered in the US more than doubled to 14,806 between 2000 and 2021, according to the Securities and Exchange Commission, although this also includes wealth managers that have grown rapidly in recent years in terms of assets under advisement and client numbers.

“If you look at the formation of businesses in asset management, one may have thought that we’d have fewer firms that were independent today,” Horgen said. “But around the world, this model has become more and more accepted . . . [and] we are seeing more independent firms today.”

He also suggested that many firms with a differentiated investment process wanted to stay independent to preserve their edge.

“I believe that you have to have a pure view in order to really understand where active can thrive . . . not all strategies can grow to the moon . . . Some of the best strategies are capacity constrained,” he said.

Horgen is not the first to question the rush to buy scale. Yves Perrier, the chair of Amundi who oversaw the firm’s expansion to become Europe’s largest asset manager, has warned that acquisitions can never substitute for organic growth within a company.

“If you do not have skills to bring to the target . . . you don’t deliver synergies,” he told the FT last year. “For me, acquisitions have never been a question of scale . . . It’s a question of reinforcing a business model. The problem for each company is to grow and to grow with profitability.”

AMG has not been without its struggles. Revenues hit $604.1mn in the second quarter, a 3 per cent rise on a year earlier, but clients pulled $11.4bn in cash as volatile markets damped risk appetite, particularly in equities, the company said. Its share price has fallen 17 per cent on a total return basis in the past year, slightly ahead of the 18 per cent average for the S&P 500 index for the asset management industry.

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