OPINION | Investment Policy
THE JOHN COLLEY COLUMN
S
ome of the financial sector’s
biggest firms are feeling the
pinch. The rise of low-cost
investment products which
simply track markets is forcing
some dramatic moves and the proposed
£11 billion merger of Standard Life and
Aberdeen Asset Management is only the
latest evidence of the shift. You see, even
the City is not immune to the basic laws
of strategy and fund managers are failing
to add enough value to justify the cost of
their services.
You might think the investment
industry is closed off to most people.
But if you have a company pension it is
likely to be invested with one or more
of the big fund management firms. And
one of the choices the people managing
our pensions have to make is whether to
choose active or passive products.
In the case of an equity fund, an active
product will have a team of well-paid
managers who research companies and
pick stocks in the hope of outperforming
a benchmark. For UK stocks, it’s often
the FTSE 100 index of top companies. A
passive fund, meanwhile, will simply try
to mimic the FTSE 100’s performance by
making sure its holdings match that index
as closely as possible.
The choice is simple then. Pay a big
fee to managers who will try to beat the
index, but who might fail miserably, or pay
a small fee for a product that essentially
guarantees you will only very slightly
underperform the index (you have to
account for the costs). The problem for
the investment industry is that people are
now opting for the latter in droves. The
growing diversity and popularity of tracker
funds, alongside evidence to support
dofonline.co.uk
their relative performance, has reached
a tipping point which is prompting major
changes.
As profits come under threat, more
firms will doubtless follow Standard
Life and Aberdeen, whilst others have
already jumped. UK firm Henderson
and US group Janus Capital announced
their merger last year, as did France’s
Amundi and Italy’s Pioneer as they sought
to rationalise product ranges and cut
administration costs. Standard Life and
Aberdeen are keen not to announce cost
savings targets, but have dismissed some
estimates that 1,000 Scottish jobs will go
to save £200m. It is likely that some front
line fund managers will end up losing
their jobs, too, as funds are merged.
The combined firm will have about
£660 billion under management but may
struggle to hang on to it. Mergers tend
to make people nervous and there are
likely to be some withdrawals of money.
The attempt to
incorporate both
Standard Life’s
Keith Skeoch and
Aberdeen’s Martin
Gilbert into the plans
is likely to result in
a lack of leadership
and infighting from
respective factions
The UK industry’s biggest player, Legal
and General, has £900 billion under
management, much of it in passive
tracker funds, and is likely to be one of the
main beneficiaries. Those investor nerves
may be sharpened by concerns over the
co-CEO appointments in the Standard
Life/Aberdeen deal.
The attempt to incorporate both
Standard Life’s Keith Skeoch and
Aberdeen’s Martin Gilbert into the plans is
likely to result in a lack of leadership and
infighting from respective factions. Such
“mergers of equals” rarely do well. Take
the infamous Chrysler/Daimler merger in
1995 and more recently the 2015 merger
of cement giants Lafarge and Holcim.
Success can come when one party begins
to assert control, but that can take time.
This industry trend is a worldwide
phenomenon. Research suggests that
at least four out of five active funds
fail to outperform trackers once costs
are factored in. Fund mergers and
rationalisation will sweep world markets
as firms wrestle with the changing
dynamics.
In the UK, passive tracker funds have
taken around 20% of the near-£6 trillion
market as of end-2015, which means they
still have 80% to aim for. Only the best
performing active funds will survive the
challenge and be able to justify fees that
tend to be five times greater than their
passive rivals.
We can find some clues to the future
in similar events in other industries.
The rise of “no frills” airlines like easyJet
proved that the one-time ubiquitous full
service airlines were charging for things
passengers didn’t need or want.
More recently, German discount
retailers Aldi and Lidl, with their smaller
stores and ranges in lower cost parts of
town, have demonstrated that many
customers do not wish to pay for huge
grocery product ranges and large
expensive stores.