Recent trends point to more consolidation in the mutual fund industry, and analysts say it could be a mixed bag for investors. Pressured by declining performance and high fees, many active funds are entering into mergers and acquisitions to reduce costs and expand their expertise.
As more fund companies consolidate, analysts say investors will have to be vigilant regarding potential changes to their fund’s strategy and exposure. Although effects are usually minimal, consolidations can occasionally produce changes in culture, management and strategy.
Big firms are quickly consolidating the mutual fund industry. According to the 2016 Investment Company Fact Book by the Investment Company Institute, the shares of invested assets managed by the five largest firms rose from 32 percent in 2000 to 45 percent in 2015.
U.K.-based Henderson group entered into a $2.6 billion agreement in early October to buy Janus Capital Group. Combined, the new Janus Henderson Global Investors PLC will hold more than $320 billion in assets. It’s just the latest in a number of mergers and acquisitions, as the active managers face growing pressure from the low-cost exchange-traded-fund industry. TIAA-CREF also purchased Nuveen Investments for $6.25 billion in 2014, while over the past decade Invesco has acquired such companies as PowerShares, AIM and Van Kampen.
Years of outflows are forcing companies to look for ways to consolidate operations and lower costs. Morningstar reports that investors withdrew more than $160 billion from actively managed funds through August of this year. During that time, they invested nearly $110 billion into passive ETFs managed by such groups as Vanguard, Blackrock and iShares.
Jeff Ptak, global director of manager research for Morningstar, says many of these mergers are strategic moves to increase scale and lower costs. He says managers are looking closer at their own operations and at opportunities to combine with other firms where they feel it would be synergistic. Many fund companies are specifically acquiring companies to enter areas that they lack experience in or may otherwise be inaccessible. “The imperatives for these mergers can vary,” Ptak says. “There could be a need to [scale], or they just believe they have complementary assets or capabilities.”
Laurence D. Fink, chairman and CEO of BlackRock, Inc., said at the Deutsche Bank Global Financial Services Conference in May that he expects more consolidation among asset managers having difficulty beating their benchmarks. He also said a new rule from the Labor Department, which requires brokers to put their clients own interests ahead of their own, will drive more investors to passive strategies. Although they “fundamentally believe there will be a massive shift more into passive strategies,” Fink said, this will make opportunities for active management to succeed to become more realistic. As large fund companies continue to acquire smaller ones, there will be little incentive to keep losers on the market, thus increasing performance by keeping only the winners.