Different routes to the top of the tree
Only the strong will survive
By William Bourne*
In 1995 Goldman Sachs analysts made a survey of the asset management industry. It concluded that the industry would be dominated by about 20 companies alongside boutiques, and that to be numbered among the big boys funds would need US$150 bn or so of AUM. Broadly speaking, the Goldman vision has proved correct, though the numbers have risen. During the ensuing 15 years we have seen the rise of exchange traded funds (ETFs), the convulsions in 2008 as overextended banks got taken over by competitors, and the rise of multi-billion pound alternatives firms. Well-known names have disappeared into the maw of a competitor. Sometimes they have reappeared in mangled form or as a letter, but more often they have gone for ever. Others have remained standing through thick and thin. Think Schroders, Wellington, Vanguard or Fidelity.
The following table attempts to track the changes over the past 15 years in the biggest twenty or so organisations today. It includes both investment asset management (defined as running money to beat a specific benchmark) and wealth management businesses (defined as looking after investors’ investment and associated needs). It excludes public bodies such as post office funds, and individual company pension funds or insurance companies. Inevitably some other categories have crept into the numbers, as it is not always possible to differentiate business areas such as real estate or even custody assets.
It is organised chronologically from bottom to top and by colour to indicate different types of transactions. Significant mergers and acquisitions are included, but sales only when the purchase has already been noted. 1995 AUM of the parent company or the major subsidiary is included at the bottom where possible, and today’s at the top. Major brand names are also shown.
The most obvious trend is the change in the size and globalisation of the largest groups. In 1995 assets of $100 bn would have put you in the top three; today, as Goldman’s report predicted, the cut off for the top 20 is well over $200 bn, and the largest, BlackRock, claims AUM in excess of $3 trillion. It probably shouldn’t surprise us that of the nine with more than $1 trillion, eight are headquartered in the US. The exception, even after its travails in 2008, is UBS. Even the giants of Japan are only on the edge of the radar screen here, with the largest, Sumitomo Trust and Banking, having $296 bn of assets. Behind this growth lies the rise of the investment culture in emerging parts of the world as much as the agglomeration of these vast asset managers.
To give a sense of the scale of the change, here is a list of the major US firms’ foreign (ie non-US) assets under management in 1995, taken from an FT survey of that date: Fidelity $27 bn; Capital Research $21 bn; Franklin Associates $15 bn; TIAA CREF $11 bn; Merrill Lynch $10 bn; Putnam $8 bn; Scudder $8 bn; Wellington $5 bn, etc.
If success is to be measured by size, there have been different paths to reach the top of the pile. Fidelity, Wellington, Capital International, Schroders and others have largely grown organically, only occasionally bolting on niche businesses, such as Schroders’ purchase of New Finance. The very largest groups, such as Bank of America, BlackRock, BNY Mellon and the latest name, Morgan Stanley Smith Barney, are the result of multiple acquisitions and mergers. If success is to be measured by reputation, however, the top names are those who have kept true to their investment philosophy, something which is always difficult when mergers or acquisitions take place. Think Fidelity, Wellington, but also some of the boutiques sitting under the major names, such as Newton.
Some firms have chosen to go for a single global brand (JPMorgan, BlackRock, GSAM, HSBCAM). Others have deliberately kept multiple names and effectively become a collection of boutiques (Invesco, BNY Mellon, Allianz). In Europe the bank assurance model remains ever popular, with a number of groupings based on a combination of banking and assurance (AXA, Allianz, Amundi, Deutsche). Those in the first group tend to be more successful in terms of size, as they can leverage their brand. But the second and third groups have also shown their staying power. They may well be more lasting in fact, boutiques because they stay true to their heritage, and bank assurance because they can rely on the distribution of the parent companies behind them.
There has clearly been some opportunism at times of distress, with Citibank and UBS both being forced to offload large subsidiaries in 2008 and 2009. It is no surprise to find organisations such as JPMorgan and BlackRock at the front here, but Aberdeen Asset Management has proven surprisingly adept, picking up assets off far larger organisations.
Who is absent? It is surprising to find no Japanese companies in the top 20 today. In 1995 Nissay, then Japan’s largest and the world’s sixth largest asset manager, claimed AUM of $332 bn, more than Sumitomo Trust does today. A combination of a declining domestic market, an inability or unwillingness to cross borders, and a cautious investment policy forced on them by regulators has caused them to stagnate.
What of the future? Investors need investment management skills more than ever as they grow older, and the pool of investors is ever increasing as emerging markets grow wealthier. That augurs well for the industry. But, as in the past 15 years, there will inevitably be different names at the top.
Firms which have grown organically such as Fidelity or Vanguard show every sign of continuing to be successful. They have proven their model can survive through good and bad times. Changes in the future are more likely to come from groups which have been acquisitive or those owned by third parties, such as Aberdeen or BlackRock. The risk is that they overstretch themselves in terms of size, or that owners become impatient of poor performance.
If I were able to look forward and see the industry in 2025, 15 years later, my first prediction would be that in one sense the future will look quite similar to the past. The numbers will be larger, the survivors a subset only of current incumbents, and the paths to success will have been multiple, not single. What will be different will be the provenance of the controlling groups. Surely they will come from the emerging markets, with China at the forefront. It is already happening in industries such as steel and cars. I cannot see why the asset management industry should be any different.
* William Bourne has worked in the asset management industry since the early 1980s. He is the principal of Linchpin IFM, an institutional fund marketing firm based in London.
Global fund firms: How they have grown