Fee pressures, net outflows, and the rise of ETFs, along with superannuation funds internalising investment management, are driving a decline in the number of Australian asset managers.
A number of funds have confirmed they are closing shop in recent months, including small caps 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 a smaller scale.
Platinum Asset Management recently confirmed it received an unsolicited, non-binding proposal from Regal to acquire all shares it doesn’t already own through a scheme of arrangement.
Additionally, reports indicate that competitors such as Challenger Investment Management and Wilson Asset Management may also be eyeing the fund manager.
Other M&A activity that took 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, equity analyst at Morningstar, noted that while rate cuts may provide short-term cyclical tailwinds for the sector – potentially extending into fiscal year 2025 – asset managers, particularly those that emerged in a low-interest environment, will face significant long-term challenges.
He told InvestorDaily that the low-interest rate environment led to funds sprouting up “like mushrooms”.
“There are so many of them because of supportive interest rates and generally the bull markets, but ever since interest rates have risen – and I don’t think they will return to historical lows – I think that will present challenges to a lot of asset managers,” he said.
“A lot of them tend to run similar strategies, run using similar investment styles, a lot of them also cater to niche clients.”
He warned that underperforming funds might close, while the sector will likely continue to see mergers and acquisitions among both small and large firms.
Despite his forecast, Ler underlined that the outlook for the landscape isn’t entirely grim. In fact, he believes the challenges will drive asset managers to adapt and innovate.
This will mean aligning their remuneration structures to more “shareholder friendly” structures, “cutting the fat” to rationalise their cost base, and diversifying their offerings, distribution channels, and products.
“I think there’s always room for active management. The demand will always be there, they have a role to play. But they really need to reinvent themselves,” Ler said.
“As an asset manager, you can still do business, but you need to be brilliant.
“Established organisations, old school fund managers, tend to have that old school mentality about how exclusive their products are or how sticky their clients are. I think that needs to change and managers really need to adapt.”
Warning for M&A seekers
Ler also had a warning for fund managers seeking merger partners, highlighting in a recent note that “not all fund manager consolidations have gone smoothly”.
Particularly, he pointed to Perpetual’s 2023 acquisition of Pendal, explaining that the two firms were too similar in style.
“When funds management companies try to merge, they need to find something truly different from them and by that, I mean asset classes, distribution team, and investment styles,” Ler said.
“When you acquire someone else, you need to make sure there are revenue synergies – as in you can put out new products, they’re quite different from yours, there’s no overlap between each other, and you can extract cost efficiencies from them. Those have high amounts of success.
“If you look at Perpetual’s example, being very diversified, they subsequently went to acquire Pendal which is quite similar to them in terms of products. I don’t think that would be value accretive.”
