For years, the asset-management industry has braced itself for shocks. In 2018, $369 billion poured out of long-term mutual funds in favor of exchange-traded funds, a record at the time. In 2019, the case for traditional actively managed mutual funds became even harder to make when Charles Schwab Corp. jump-started a race to the bottom among online brokerages by eliminating commissions for ETFs along with U.S. stocks and options.
If those were tremors, 2020 will go down in history as an earthquake.
Even before Covid-19 roiled global markets and brought the Robinhood crowd and Dave Portnoy of Barstool Sports into the Wall Street zeitgeist, there were already signs of seismic change. On Feb. 18, just a day before the S&P 500 Index set a pre-pandemic record, Franklin Resources Inc. announced a deal to acquire asset manager Legg Mason Inc. for almost $4.5 billion, a move that would bring its combined assets under management to $1.5 trillion. For both Franklin, an iconic investment manager that started in 1947, and Legg Mason, whose precursor firm dates to the 19th century, it was a tacit admission that they could no longer compete with BlackRock Inc. and Vanguard Group Inc. on their own.
The global pandemic could only constrain this consolidation for so long. In early October, Morgan Stanley announced it was acquiring Eaton Vance Corp. for about $7 billion. Bringing in the Boston-based company’s more than $500 billion in assets meant Morgan Stanley Investment Management would manage about $1.2 trillion, finally reaching Chief Executive Officer James Gorman’s goal to join the $1 trillion club.
Morgan Stanley’s move created something of a domino effect among banks. By the end of the month, Bloomberg News had reported that Bank of Montreal was exploring options for its fund business, which managed more than $273 billion at the end of 2019, as was Wells Fargo & Co., which had $607 billion in assets compared with more than $1 trillion managed by rivals JPMorgan Chase & Co. and Goldman Sachs Group Inc.
Across the Atlantic, Societe Generale SA decided to pursue a sale of its Lyxor asset-management business, which oversees $180 billion and is one of Europe’s largest providers of exchange-traded funds.
Even Australia got in on the action. Earlier this month, Sydney-based Macquarie Group Ltd. struck a $1.7 billion deal to buy Waddell & Reed Financial Inc.’s $72.4 billion asset-management unit to expand its U.S. footprint. That’s even after clients yanked almost $16 billion from Waddell & Reed’s funds since the start of 2019. Macquarie, like Goldman and Morgan Stanley in the U.S., is searching for more stable revenue sources than typical investment banking.
If all that weren’t enough, Bloomberg News on Friday dropped perhaps the biggest asset-management bombshell yet: State Street Corp. is exploring options for its asset-management business, reportedly evaluating combinations with Invesco and UBS Group AG. State Street Global Advisors has more than $3 trillion under management, including the SPDR S&P 500 ETF Trust, which became the first U.S. ETF in 1993 and is the world’s largest with about $320 billion in assets. According to Eric Balchunas at Bloomberg Intelligence, State Street’s ETFs took in $25 billion this year, with 86 different funds experiencing inflows. All that, and yet it still might be sold.
This news came just a few days after JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon openly encouraged bankers to call him with their M&A ideas, including in asset management. “Morgan Stanley’s done a good job with a couple of deals they’ve done,” he said. “So asset management, my line is open. It’s a scaled business. It’s a distribution business. It’s a brand business. It’s got to make sense.”
My Bloomberg Opinion colleague Elisa Martinuzzi cited State Street as an intriguing option for JPMorgan, as it looks like the only feasible takeover that would be enough to propel the bank’s $2.6 trillion asset-management business into the same stratosphere as BlackRock and Vanguard. Crucially, it would be a quick way to become a even more serious threat in ETFs. Until recently, its Ultra-Short Income ETF (ticker: JPST) was the largest actively managed ETF.