I have long believed the asset management industry is ripe for consolidation. There are over 1,000 asset management companies in Europe.
The fragmented nature of the industry is even more apparent at the product level, with over 2,000 onshore open-ended funds and well over 11,000 offshore funds available to UK investors alone. In global terms, there are over 50,000 mutual funds – more than all the stocks quoted on all the exchanges in which these funds can invest in.
During the 1980s and 1990s, when equity markets regularly posted double-digit returns, it was easy to make money in asset management. Now we have more normal patterns and can expect more modest average returns, fund management companies which have failed to revisit their business models will find life tougher.
There is some scope for consolidation at the top end of the industry. This should lead to a cluster of big players which can extract economies of scale. But I also believe this will not be the only model to succeed. There is plenty of room for small boutique managers which specialise in a select number of specialist areas. It is the middle ground that I believe will thin.
The key strategic goal of the Isis management team has been to become a top five UK asset manager by 2007. The proposed merger with F&C will enable us to achieve this ahead of target, creating the fourth-biggest asset manager in the UK and giving the business a European footprint. For F&C, it achieves its stated goal of achieving a Stock Exchange listing. Our parent company Friends Provident will benefit by further diversifying its profit stream and deepening the pool of investment skills for policyholders.
The two companies have a compelling strategic fit in terms of geography, client types, products, skills and assets. Isis is a largely UK business with a high exposure to insurance assets while F&C is focused on continental Europe with a major presence in the Netherlands, Portugal and Ireland. Over the last two years, much of Isis's focus has been to develop our UK retail business while F&C has a much bigger presence in the institutional pensions sector. Investment trusts are an integral part of the heritage of both companies.
Given these complementary strengths, it was natural for us to decide that the institutional process and philosophy of F&C should be the one adopted for the combined group. In the UK retail market, where Isis offers a much wider range of open-ended funds than F&C, the Isis platform – where fund managers are allowed a high degree of flexibility in approach – will be the one that will be adopted for the enlarged company. What does this mean for readers of Money Marketing and their clients?
First, the new business will be well diversified by assets and revenues. This is good news for our shareholders and will also benefit clients and other stakeholders since a profitable, stable company will be well positioned to attract and retain talent. We will be putting a new long-term incentive scheme in place based on restricted stock.
Second, the merger will deepen the resources available to our fund managers, not least by extending our UK office network to sites in the Netherlands, US, Portugal, Germany and France. Both companies have a strong belief in proprietary research that will be reflected in the enlarged group.
Third, the fit of the two businesses means we do not anticipate any significant fund rationalisation programme in the UK. F&C has a very small range of open-ended retail funds in the UK and, since Isis conducted a comprehensive fund rationalisation exercise in 2003, the main change that will take place is a rebranding of our funds.
Brand is an emotive issue. We have worked hard to develop the Isis brand with considerable success. This transaction brings together one of the newest brands in the market, Isis, with one of the oldest and best-regarded, F&C. An option would have been to run two parallel brands but we do not believe this is a credible way of building the enlarged business. It would duplicate expenditure and send confused messages. We believe it is right to adopt one brand and get fully behind it.
Our pride in the Isis brand has to be set against the reality that F&C has a long heritage and is better known in Europe. This is critical for a business which will be pan-European.
Both F&C and Isis have a significant commitment to investment trusts. There is little overlap between the two ranges of trusts and each trust will continue to be managed and branded in line with the wishes of their independent boards.
Both Isis and F&C bring some specialist skills to the table that should benefit all of our clients. Isis is a market leader in fields such as socially responsible investment and venture capital trusts, areas where F&C does not offer product.
The enlarged group will continue to support and develop these services and key brands will be retained.
This merger represents a very exciting phase of our development that will transform both businesses to the benefit of our clients. Until the merger completes it will be business as usual for Isis and F&C but our goal will be to integrate these two businesses as speedily as possible with minimal disruption.
Howard Carter is chief executive of Isis Asset Management and is the proposed chief executive for the enlarged group