Of course, the easiest path isn’t always the best one. So far, the announced consolidations make sense on their face. Invesco’s decision to buy OppenheimerFunds from Massachusetts Mutual Life Insurance Co. in late 2018 was a way to bulk up in active management while achieving hundreds of millions of dollars in savings.
Franklin and Legg Mason combined strike an almost perfect balance between institutional and retail investors, while Franklin retains its identity as a fund manager that seeks global opportunities. Eaton Vance has the kind of white-shoe culture that has long defined Morgan Stanley — certainly much more than E*Trade Financial Corp.
Nick Maroutsos, head of global bonds at Janus Henderson Investors, has experienced the industry’s consolidation first-hand. In 2006, he co-founded Kapstream Capital, which was purchased in July 2015 by Janus Capital Group, which then merged with Henderson Group soon thereafter.
Kapstream “slid in nicely to add another feather in the overall fixed-income cap,” Maroutsos said, given his funds focused on global absolute-return strategies. “For us, it was really important to get that distribution channel. Janus is notorious for doing exceptionally well in the retail space. And they’ve proved that — I mean, we started our ETF four years ago with $25 million and now we’re at $2.9 billion,” he said, referring to the Janus Short Duration Income ETF (VNLA).
“I don’t see why it would stop,” Maroutsos said of the trend toward mergers and acquisitions. Still, while “consolidation can be good, it can also be poor if it’s not executed correctly,” Maroutsos said. “I don’t think it’s as easy as just merging companies and saying ‘OK, we’re going to be better off.’”
Dimon and other CEOs know this, of course. But if the late burst of activity in 2020 is any indication, it’s going to be difficult for them to resist acting quickly for fear of being left behind. Bloomberg Intelligence’s Alison Williams sees Goldman, Invesco and DWS Group joining JPMorgan as the next round of potential buyers. Potential targets could include WisdomTree Investments Inc. and — believe it or not for Maroutsos — Janus Henderson, among others.
Fund flows this year should add a sense of urgency for asset managers. Bloomberg News’s Katherine Greifeld reported that investors have added some $427 billion to U.S. ETFs in 2020, while mutual funds have lost about $469 billion, which would be the worst outflow ever in three decades of Investment Company Institute data. It’s not quite “game over” for traditional mutual funds, but it’s unclear how they plan to recapture the market share they’ve lost. Management fees can only drop so much before talented investors seek other opportunities. And even then, BlackRock and Vanguard can seemingly always go lower. Especially in fixed income, where yields across the board are near record lows, a difference of a few basis points in the expense ratio can make a noticeable difference.
Certainly, lower-cost investing products shift huge sums of money from fund managers to individuals, which is better for just about everyone except the professional investor class. But if asset managers continue to consolidate so briskly, it’s not hard to envision a future in which individuals have a choice of just a small group of super-sized investment managers, each of which owns a giant chunk of every company. My Bloomberg Opinion colleague Matt Levine raised some uncomfortable questions about this trend after the Franklin-Legg Mason merger in February:
If the same dozen people control every public company — Harvard professor John Coates calls it “The Problem of Twelve” — what does it mean? Should someone do something? Should those people be required to … explain their votes? Not vote their shares? Vote in a specific way? Ask their ultimate investors how to vote? Have some other formalized rules for how they vote? They have accrued all this power, sort of by accident; should there be rules for how they exercise it? Or is this just how the market works and everything is fine?
There aren’t any clear answers. But flows into ETFs suggest individuals have no qualms with the sheer scale of a company like BlackRock, which managed the Federal Reserve’s Secondary Market Corporate Credit Facility and has had two of its executives tapped for important roles on President-elect Joe Biden’s economic team. As Levine has pointed out, the economy is increasingly tied together by common ownership of all companies by the same investors. This should probably raise some red flags. But much the way tech giants have largely brushed off lingering privacy concerns, the ease of trading ETFs and their rock-bottom costs are likely to win the day.
This year will be remembered for any number of reasons — a tipping point in the investment management industry is likely one of them. It could get even more frenetic in 2021. All indications suggest the asset manager arms race has only just begun.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.