Switching to an inorganic diet

Expect an M&A response to the challenges of a low-return world

A low-return world creates four challenges for asset managers
The next few years are likely to be challenging for asset managers. We expect a persistent low-return environment to: (1) result in industry growth as much as c.400bp lower than in recent years; (2) make it hard to build compelling asset management products; (3) increase pressure from
passive strategies; and (4) add further pressure on pricing, which we believe is already declining by c.2% pa.

We expect asset managers to deploy three M&A responses
This environment is likely to force asset managers to reevaluate inorganic growth options. We expect M&A to take three forms (in line with recent activity, likely centred on the privately owned asset managers): (1) asset managers with surplus capital seeking to acquire scale players, generating significant earnings accretion and adding scale in a consolidating global industry; (2) low yields on traditional fixed income are likely to drive institutional demand for alternative credit, real assets and other ‘shadow banking’ activities. We expect asset managers to ‘bolt-on’ expertise in this area in an effort to underpin their institutional flows; and (3) we expect European asset managers to seek M&A that strengthens their access to the banking channels that dominate European and Asian distribution.

Key rating changes: Amundi to Buy, Aberdeen to Sell
We see Amundi as best-placed to enhance EPS through M&A (to Buy, from Neutral). A more challenging industry backdrop may mean a sustained turnaround in flows at Aberdeen takes longer than expected (to Sell, from Neutral). Man Group is removed from the Conviction List (remains Buy).

Chris Turner, CFA – Equity Research – Goldman Sachs International