Has anyone else noticed an increasing appetite for acquisition among investment managers throughout 2020? A plethora of deals sandwiched in between London-based Jupiter Asset Management’s decision to buy Merian at the start of the year, and Morgan Stanley’s recent takeover of Eaton Vance, have taken place. From smaller deals such as U.K.-based Liontrust snapping up Architas’ multi-manager arm for a mere $92.5 million, to the larger deals including Franklin Templeton’s $6.5 billion purchase of Legg Mason, just what is behind all this consolidation?
Well, it is no secret that this seemingly never-ending era of low-interest rates and quantitative easing (QE) has left asset managers with little choice but to try and increase their revenue books through M&A. This is hardly surprising given how challenging it has been to generate alpha for investors. A recent bi-annual report from S&P proved just how challenging the environment has been, with the average active manager consistently underperforming the benchmark index in 2020. The phrase “we can’t go on like this” springs to mind. After all, investors will only put up with the “we are still beating our peers” excuse for so long.
While acquiring a bigger book of business may make sense in the short term, investors will be asking whether acquisitions are the long-term solution to delivering better returns. Active managers also have to accept that the unveiling of numerous successful vaccines is only going to increase inflows in global index trackers. November alone showed record inflows of $121 billion, a jump of 14.5% on the previous best month. But this is not to say that it is all doom and gloom. Experienced and skillful active managers will be able to identify previously undervalued companies that have a post-pandemic upside. Plenty of investment opportunities could emerge in areas such as online shopping and digital commerce.
However, active managers can only take advantage of these opportunities if they focus on transforming their newly acquired funds through digital adoption. The key to achieving this will be the seamless integration and automation of workflows post-acquisition—as this allows active managers to generate fresh insights from new and alternative datasets. And it is these insights that will be key to being able to generate alpha. If there was ever a moment for active managers to restate their worth and the value they can bring to investors, it is in 2021. Much of the success of this year’s acquisition spending spree will, as always, depend on the response from shareholders.
Varghese Thomas is president and chief operating officer of TradingScreen, which provides SaaS based trading technology for hedge funds, large asset managers, mutual funds, and brokers.