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Consolidation street

People in our industry talk a lot about consolidation among asset managers although there are few signs that this is happening. Personally, I prefer to focus my business on running money effectively and developing client relationships rather than committing valuable time to deciding where we can buy assets from somebody else.

I believe that long-term success or failure in active management comes down to listening to clients and delivering targeted products that meet their needs. Long-term success has little to do with how big or small your business is. Acquisitions are phenomenally difficult to get right.

However, there are several triggers that could potentially drive a bout of consolidation in our industry. First, CP185 is likely to accelerate the introduction of performance-related fees. This could drive consolidation because it has the potential to reduce margins on an existing book of business where performance is lacking.

Investors will demand more for their money and increasingly expect to get what they pay for. At the moment, managers have little impetus to dispose of non-performing assets. With performance fees, if a proposition does not stack up, a manager will be keen to sell loss-making assets.

The faster that advisers move towards performance-related fees and the punchier that asset managers make this pricing, the quicker the pace at which the weakest performers will exit the market. DWS is very much in favour of this trend and already offers performance fees on several of its funds.

Second, the Ucits 3 directive introduces the prospect of market-neutral hedge funds. As these products start to be introduced, this will undoubtedly put groups without the capability to diversify their proposition under pressure. These firms could find it hard to cope with declining pricing power within their traditional book of long-only business.

Last is a lack of distribution partnerships. As advisers increasingly support platforms that can negotiate attractive pricing with asset managers, sources of direct business are drying up. Groups that do not attract new money really have little impetus to hold on to their existing book of business.

In a knee-jerk reaction to depolarisation, some groups have scaled back their IFA sales teams and client-facing staff. This seems to run contrary to the emerging trend. After all, asset managers can only count on a rising demand for face-to-face contact and support on issues such as investment training, communications and public relations.

Talk of consolidation in our industry often involves a comparison between global businesses and boutiques. My view is slightly different. Rather than trying to pick winners, advisers can save their clients some heartache by focusing attention on the likely losers, namely, asset managers that sit in between the two camps.

These ghost ships are most at risk of disappearing and it should be easy for advisers to pick out these firms. They sit quietly in the mid-range of our industry, living off a few cash-cow products but gradually haemorrhaging talented people. Their sales teams are an endangered species and they seem to get through more managing directors than factsheet books.

On the face of it, the trend towards globalisation among asset managers appears to have yielded to segmentation and niche-driven strategies. But while global resources can mean a diverse specialist talent bank, the real challenge is translating this into products that appeal locally.

This is where many of the big players are losing their way. Too often, products that work in other markets are peddled in the UK without feedback and buy-in from client-facing personnel. This has dictated which businesses have taken share, regardless of whether they are big or small. Those which have really listened to client needs and taken action are profiting.

However, the recent shift to boutiques is dangerous to extrapolate because, in recognition of this threat, the balanced houses are fighting back by aligning their teams to compete directly with the boutiques. Many firms labelling themselves as boutiques are now trying to compete in numerous product categories. They are no longer the focused teams of specialists pursuing a niche strategy and this is stretching their resources to the limit.

Inevitably, some of these firms will be swallowed by those that they sought to challenge.


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