EDINBURGH — The merger of Scotland’s two largest money management companies is the biggest attempt yet in Europe to defend the old-fashioned business of picking stocks and bonds in the intensifying battle against cheaper, better-performing funds that track indexes.
Standard Life Plc’s 3.8 billion-pound ($4.7 billion) deal announced on Monday to buy Aberdeen Asset Management Plc will cut costs, improve earnings, and make it easier to attract and retain clients by offering a broader range of products, they said.
For the industry, it underscores the biggest challenge to its model for decades: larger “passive” funds drawing customers while more expensive “active” managers who use research to select investments are losing them. Schroders Plc chief executive Peter Harrison last week called index funds the “big bogey” and companies have to come up with ways to counter them. Both Standard Life and Aberdeen are trying to staunch an outflow of funds and are banking on investors returning to active managers to eke out better returns.
“The jury is out on whether it can stem the tide,” said Colin McLean, founder and CEO of Edinburgh-based money manager SVM Asset Management. “Mergers give the opportunity for cost cutting and some rationalization, and help share some of the other costs. But I’m not sure that it necessarily helps win more business back from passives.”
The UK fund industry oversees about $8.6 trillion of assets, making it the biggest in the world after the United States, and the pressure to reduce costs is coming from regulators and politicians as well as competitors in the world of low inflation and interest rates.
The hook-up would create a company with 660 billion pounds of assets and make it Britain’s largest active manager. Now it has to contend with changing market forces.
“We are operating in an environment where major headwinds continue to buffet the savings and investment market place and therefore affect the asset management industry,” Standard Life CEO Keith Skeoch said on a conference call to discuss the transaction. The investment environment has “increased the client’s need for active management,” he said.
In Europe, Morningstar Inc. figures show index-tracking investments account for about 15 percent of the market, though the trend in the United States suggests it will keep rising. Passive funds are likely to overtake their active counterparts in the United States by 2024 at the latest, Moody’s Investors Service said last month.
In the background, new European regulations are estimated to add an extra $2.1 billion in technology costs alone this year. In response, active managers are introducing new strategies including securitized credit that index trackers can’t replicate to maintain their fee income.
First, they have to improve performance and beat indexes, according to passive investment specialist Vanguard Group Inc. Its research showed 64 percent of active equity managers and 73 percent of bond managers globally trailed behind their benchmarks over the 15 years through 2016. Vanguard’s chief investment officer, Tim Buckley, said in an interview last month there would only be a revival in active management if costs fell.
“Fund management groups are adapting to a slightly different world, where passive funds have made great strides,” said Laith Khalaf, a senior analyst at Hargreaves Lansdown Plc. “It makes sense that bigger is sometimes stronger.”
Aberdeen has been hurt by weaker sentiment toward emerging markets and suffered outflows in the past three years.