Fee pressures, net outflows and the rise of ETFs, as well as superannuation funds internalizing investment management, are leading to a decline in the number of Australian asset managers.
A number of funds have confirmed their closures in recent months, including small-cap manager NovaPort Capital in May, ethical fund manager Ethical Partners in July and last week, specialist income manager Wheelhouse Investment Partners.
Others have been forced to merge, particularly those of smaller scale.
Platinum Asset Management recently confirmed that it has received an unsolicited, non-binding proposal from Regal to acquire all shares it does not already own through a plan of arrangement.
Additionally, reports indicate that competitors such as Challenger and Wilson Asset Management may also be interested in the fund manager.
Other M&A activity that has taken place this year includes Regal’s bid for Merricks Capital and Australian Ethical’s acquisition of Altius Asset Management.
Reflecting on these changes, Shaun Ler, an equity analyst at Morningstar, noted that while rate cuts may provide a near-term cyclical tailwind to the sector – which could extend into fiscal 2025 – managers assets, particularly those that emerged in a low interest rate environment, will face significant long-term challenges.
“There are so many because of favorable interest rates and generally bull markets, but since interest rates have gone up — and I don’t think they’re going to go back to historic lows — I think this will present challenges for many assets. managers,” he said.
“A lot of them tend to apply similar strategies, use similar investment styles, and a lot of them also cater to niche clients.”
He warned that underperforming funds could close, while the sector will likely continue to see mergers and acquisitions among small and large firms.
Despite his predictions, Ler stressed that the outlook for the landscape is not entirely bleak. In fact, he believes the challenges will push asset managers to adapt and innovate.
This will mean aligning their compensation structures with more “shareholder friendly” structures, “trimming the fat” to rationalize their cost base and diversifying their offerings, distribution channels and products.
“I think there is always room for active management. The demand will always be there, they have a role to play. But they really have to reinvent themselves,” Ler said.
“As an asset manager you can still do business, but you have to be brilliant.
“Established organizations, old-school money managers, tend to have this old-school mentality about how exclusive their products are or how attached their clients are. I think this needs to change and managers really need to adapt.
Warning for M&A Researchers
Ler also issued a warning to fund managers looking for merger partners, pointing out in a recent note that “not all fund manager consolidations have gone smoothly.”
He notably mentioned the acquisition of Pendal by Perpetual in 2023, explaining that the two companies had too similar a style.
“When fund management companies try to merge, they have to find something really different from them and by that I mean asset classes, distribution team and investment styles,” said Ler.
“When you acquire someone else, you need to make sure there are revenue synergies: to the extent that you can launch new products, they are very different from yours, there is no overlap with each other and you can save money. These are very successful.
“If you look at the example of Perpetual, being very diversified, they then acquired Pendal which is quite similar to them in terms of products. I don’t think it would create value.
