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MONEY MANAGEMENT

Sometimes, being big or small is the real problem

Deb Clarke
Deb Clarke thinks size can lead to distractions, especially for large money management firms.

While midsized money managers might be struggling with myriad pressures, sources said it does not always pay to be big or small.

James Twiss, managing director, Americas, for First State Investments in New York, said being a midsized manager has its benefits.

“There's this belief that boutiques are agile and midsized managers are not. I don't agree with that,” he said. In fact, he added, midsized managers “have a lot of advantages over large and small firms.”

“For large firms, it's hard to attract top talent for different reasons. For small, boutique firms, they struggle with the resources to evolve and to create new products,” said Mr. Twiss.

Deb Clarke, Chicago-based global head of investment research at Mercer Investment Consulting, agreed that “big is not necessarily beautiful.” Larger firms might be distracted by their size, losing sight of their focus and skillset, and may “end up becoming more of a product-push house than an investment house.”

Chris Thompson, senior investment consultant, head of North American equity manager research at Willis Towers Watson PLC, New York, said the consulting firm advises its clients that “the scale of the asset manager is only one portion of what makes them successful. On our roster of the managers we recommend, we have everything from single-product boutiques to very large organizations.”

Mr. Thompson added he often finds that midsized managers “can be in the sweet spot: they've gotten past viability concerns, but haven't gotten so large they've become unwieldy.”

And those managers opting for an M&A exercise should also take care.

Ms. Clarke said consolidating firms is about bringing people together, which can be challenging: “The important thing is how the cultures fit.” From a manager researcher point of view, one of the key things Mercer looks for is whether firms are likely to “still be there in five years and successful.”

While the industry has seen three major mergers and acquisitions more recently, sources expect further consolidation and restructuring as a way of coping with the pressures of increased costs, scrutiny and a smaller pool of assets to manage.

“But we would also point out that while M&A is one way to do it, studies have shown that they tend to disrupt value as well,” said Manuel Arrive, senior director in the fund and asset manager group at Fitch Ratings, based in Paris. “The key challenge of mergers in the asset management world is to retain clients, retaining AUM and keeping key people and talent but clients do not generally react well to mergers,” he said.

Ms. Clarke agreed. With a merger, “even if you give guarantees I think people are still unsettled ... and people get distracted ... We would say as a result it is harder to have the conviction to say in five years' time these people will still be managing your assets.”

She said mergers where businesses are still run as boutiques, but as part of a bigger framework is one successful way to manage consolidation.

Mr. Arrive said the rationale behind a merger or acquisition must also be carefully considered. “(It) may fail to deliver — putting together two businesses does not necessarily mean there are synergies, and diversification does not necessarily reduce risk. There are integration costs, and non-synergies that need to be carefully estimated. Execution risk also has to be carefully estimated as does the price of acquisition,” he said. 

This article originally appeared in the May 1, 2017 print issue as, "Sometimes, being big or small is the real problem".