Retail growing in importance post mergers

Institutional assets represent a shrinking portion of firmwide AUM for money managers that have acquired peers, a Pensions & Investments analysis of the largest recent tie-ups in the industry shows.

P&I reviewed large-scale money manager combinations that include Invesco Ltd.'s 2019 acquisition of OppenheimerFunds Inc., as well as Henderson Group PLC's purchase of Janus Capital Group Inc., Standard Life PLC's acquisition of Aberdeen Asset Management PLC and Amundi Group's deal to buy Pioneer Investments, which all occurred in 2017.

Among the five completed deals — including State Street Corp.'s 2016 acquisition of GE Asset Management, which made GEAM a part of State Street Global Advisors — institutional assets declined as a percentage of total AUM for acquiring firms. The analysis also found that firms facing outflows before their combinations did not see the bleeding stemmed or reversed through unions with other money managers.

Lee Beck, managing partner at Kudu Investment Management LLC, a New York-based capital provider for asset and wealth management firms, said that money manager consolidation has not proven to help firms that have struggled on their own, only to "prolong the inevitable," in most cases.

"If you do not have differentiated performance or investment acumen, you are not escaping the concern that institutions are not going to give you capital," Mr. Beck said. "Those are the drivers to success."

State Street and Amundi were the only purchasers to see their share prices increase from the date of their deal announcement through Feb. 27, a period P&I tracked for all firms. State Street's stock returned 4.4% during the period, while Amundi's stock returned 10.5%. In addition to providing asset management services through its SSGA operations, State Street also offers investment servicing, custody and investment research and trading services to clients.

Data was also collected for Franklin Resources Inc. and Legg Mason Inc., which announced last month that the firms were combining.

Share prices for the publicly traded money managers were reviewed as the stock market began its nosedive last month as a result of concerns about the containment of the coronavirus and its impact on the economy. By March 12, the S&P 500 entered a bear market after rapid declines, as did the Nasdaq Composite and Nasdaq 100 indexes.

Among completed deals, SSGA's institutional AUM represented 80.7% of its total $2.24 trillion in assets at the end of 2015 before it completed its acquisition of GE Asset Management the next year in July. As of the end of 2015, GE Asset Management was 95.6% institutional with $110.2 billion in firmwide AUM, according to data the firms reported in an annual P&I survey of the largest money managers.

In comparison, SSGA was 74.1% institutional at the end of December with $3.12 trillion in firmwide AUM, the company confirmed.

Separately, Invesco reported in an annual P&I money manager survey that its institutional AUM represented 36.2% of its $888.2 billion in firmwide assets as of the end of 2018, prior to the May 2019 completion of its acquisition of OppenheimerFunds. As of the end of 2018, OppenheimerFunds, which had $213.9 billion in AUM, was 34.1% institutional, the firm reported to P&I at the time.

The combined firm was 28% institutional as of the end of December, with $1.23 trillion in total AUM, Invesco reported in its latest earnings.

Before the deal, Invesco also reported $28.9 billion in net outflows in 2018. In 2019, after acquiring OppenheimerFunds, Invesco reported $40.8 billion in net outflows.

In 2016, Henderson and Janus reported a combined $7.9 billion in net outflows prior to the tie-up. The combined firms had $10.2 billion in net outflows in 2017, $18.1 billion in net outflows in 2018 and $27.4 billion in net outflows in 2019, the company confirmed.

Similarly, Aberdeen Standard Investments' outflows have continued since the acquisition. In the three years preceding their combination, Standard Life and Aberdeen had a combined £82.4 billion ($101 billion) in net outflows. From 2017 through 2019, the combined firm had £91.2 billion in net outflows, the company confirmed.

SSGA, Invesco, Amundi, Franklin Resources and Legg Mason declined to comment for this story. Standard Life Aberdeen and Janus Henderson Investors did not respond for comment by publication deadline.

The trend of money managers' firmwide AUM slowly tilting away from institutional assets is not one only affecting the firms that were reviewed by P&I, but "an industry phenomenon," Mr. Beck said.

Many asset managers start their capital raising in the institutional channel, particularly as there is a higher adoption rate from these investors, which are more willing to be the first investor in a strategy if they can have management fees waived or reduced, he said.

But once managers have penetrated the institutional market with success, "the next bastion is diversification in the intermediary markets," Mr. Beck said.

The fact that institutional business, as a portion of firms' total AUM, is shrinking, isn't likely to be a concern for many institutional clients, however, as long as "they are still being serviced in the same way they always have been," he added. Institutions would only express concern about an asset manager venturing further into the retail market if there is a change in the investment acumen or philosophy, service, pricing or fee structure that does not benefit them, Mr. Beck said.

In a pending deal, Legg Mason is set to be purchased by Franklin, a largely retail manager that had 72% of its $698.3 billion in assets as of Dec. 31 from retail clients. Legg Mason, on the other hand, had 74% of its firmwide AUM from institutional clients at that time.

Jennifer M. Johnson, president and CEO at Franklin Resources, said in an interview last month with P&I that Franklin has a history of acquiring asset managers and "leaving the integrity of the investment team and process" in place. As such, the firm would keep the investment teams across Legg Mason's investment affiliates "completely independent," she said.

Russell K. Ivinjack, a Chicago-based senior partner at Aon Hewitt Investment Consulting Inc., said that the deal may allow both firms to diversify, taking investment strategies that were predominantly institutional and seeing if they work in the retail channel, or vice versa.

It is often up to an institutional investor's preference whether a firm's retail vs. institutional business mix is of concern, he added. "You will see some who only want investment boutiques and some who are more biased to more diversified managers," he continued.

Since money manager combinations like the Franklin and Legg Mason deal are about "business viability," institutions will be focused on how "they are advantaged or disadvantaged" by the deal, and how investment teams will be incentivized looking forward, Mr. Ivinjack continued.

James Tamposi, a senior analyst in the institutional practice at Cerulli Associates, Boston, said in general, "institutional clients will scrutinize any M&A activity" to make sure the manager "is growing thoughtfully and growing for the long term."

In scenarios where a largely retail manager acquires an institutional firm, "as long as the firm has a good story to pursue the acquisition, institutional clients will be less worried," Mr. Tamposi said.

After reaching out to institutional clients of Legg Mason and its affiliates, 6 of 7 investors that responded to P&I late last month said they were not overly concerned about the Franklin acquisition or were still evaluating the situation.

Kristen Basso, a spokeswoman for the $20.4 billion Kansas Public Employees Retirement System, said in an email, however, that the Topeka-based plan had placed Legg Mason affiliate Western Asset Management Co. "on probation," while it monitors any possible impact of the Franklin acquisition on Western's investment philosophy and process, investment professionals and investment performance.

Western manages $400 million in a strategic fixed-income strategy for KPERS' yield-driven investment portfolio.

Jim Cahill, a partner at Plano, Texas-based Attacca International LLC, a corporate development and advisory firm for asset management and other financial services companies, said that Franklin acquiring Legg Mason wouldn't be an inherent concern for institutions simply because Franklin is a more retail-oriented manager.

"If there was a plan to change certain things for institutional investors, that would be a concern," Mr. Cahill said. But short of that, he doesn't expect institutions to be too worried about Franklin's business mix, given its scale and resources.

"(Franklin is) a top-tier firm. It has institutional business practices and a top-tier management team," Mr. Cahill said.

James Comtois contributed to this story.