The recent announcement of a merger between the two Scottish asset managers Standard Life and Aberdeen has sparked interest again in the sector. The deal will see the new entity total £660bn assets under management and make it the largest asset manager in the UK. This follows the October announcement of Janus and Henderson merging in a share deal which will help both firms expand globally from their respective US and UK bases.
The asset management industry has provided an interesting investment thesis. Asset managers with a strong investment offering have long standing client relationships, giving earnings quality from stable funds under management and the industry has also benefitted from the strong performance of equity markets. Despite the attractive returns, operating margins have been eroded by higher regulatory costs, as the industry introduces new legislation to protect investors. There has also been a rise in popularity of passive investing, that provides a low cost entry point for investors. Mutual funds providers such as Vanguard and exchange traded funds have provided greater competition to the traditional active fund management firms with low fees and products that track indices.
However, there continues to be a major opportunity in the industry surrounding the pensions market. Private businesses over the last twenty years have come to realise that pension scheme liabilities are rising, which has meant they have had to cover the shortfall (Pension Deficit). This has seen the decline of guaranteed income on retirement (Defined Benefit Pensions). This means the current working population will have to save earlier and more for retirement (Defined Contribution Pensions).
Pension Deficit: A pension deficit is where assets do not cover the future costs of paying pension members’ guaranteed retirement incomes.
Demographics, an ageing population, as well as legislation with auto enrolment into a workplace pension and an increase in the state retirement age are all in favour of the asset management industry. The regulatory environment appears to be factored into valuations and could provide an opportunity for income investors given the long term pensions environment and short term catalyst from the prospect of further deals.
All data correct at time of writing, 4 April 2017