Within days of taking over at Crédit Agricole’s asset management division, Yves Perrier knew the business could only survive by doubling in size. It was late 2007 and while other executives at the French bank were grappling with the early signs of the financial crisis. Mr Perrier was starting to put together a strategy to turn the parochial unit — with assets of €480bn — into one of the world’s biggest investment businesses.
“We wanted to be number one in Europe,” he says.
His first step to meeting that target was to partner with the asset management branch of a former employer, French banking rival Société Générale. He convinced senior managers at the two lenders to merge and spin off their fund management arms, creating Amundi in 2010. Years of fervent asset gathering followed, culminating in the €3.7bn acquisition of Pioneer Investments, the fund management business of UniCredit, the Italian bank, 12 months ago.
In parallel Mr Perrier also developed a plan to “industrialise” the business: boosting assets under management while driving down the cost of running it. Despite some internal opposition the ultimate aim was to build a company that could compete with the very biggest players in asset management: the trillion dollar club, which includes just a handful of names, such as BlackRock, Vanguard and State Street.
Amundi was inducted into that club in 2016 just months after Mr Perrier took it public in the biggest flotation on the Paris stock exchange for a decade. The IPO raised €1.5bn for Mr Perrier’s acquisition strategy and valued the group, still 80 per cent owned by Crédit Agricole, at €7.5bn.
But now Mr Perrier’s vision is under intense scrutiny. The company’s shares have lost a fifth of their value in recent months as a result of a flood of outflows from its Italian business, amid the country’s political turmoil. But the questions confronting Amundi go beyond Italy: they strike at the heart of the group’s strategy of using acquisitions and greater scale to withstand the immense challenges that the industry faces.
“If we think these [Italian outflows] are a one off, then fine. But if it is the start of a longer trend, then that’s a concern,” says Haley Tam, managing director of European diversified financials at Citigroup.
Asset managers play a critical role in the global economy, such as investing the retirement savings of hundreds of millions of workers. But while their influence has grown, the industry is undergoing profound changes that threaten the way they do business.
Fees are under pressure as customers move to cheaper products and costs are rising because of new regulatory burdens. And unlike the largest US managers, which invested heavily in developing passive funds over the past two decades, Europe’s managers have tended to focus on more traditional pricier products such as actively managed funds.
Supporters believe Mr Perrier’s dealmaking will give Amundi the ballast to survive these problems at a time when other European asset managers are being forced to pull out of markets and lay off staff. But others warn that Amundi’s growth spurt could just be a way of delaying the harsh realities in an industry that Boston Consulting Group likened last year to an exhausted athlete, accelerating, as they charge downhill.
“If assets stay the same or drop — which we expect — then you face the perfect storm of fees coming down, assets coming down and costs going up,” says Renaud Fages, a partner at BCG. “Historically asset managers would just cut back bonuses in bad times. But that is not sustainable and will not be enough in the current environment. Instead they will have to start thinking hard about more fundamental changes.”
The zeal to expand has spread across the asset management industry as executives came to the conclusion that their businesses will be consumed unless they are able to join the ranks of the very biggest players. M&A strategies have become less about market domination and more about survival.
On the surface that looks to have worked. Assets under management swelled to record levels in 2017. But most of that accumulation was the result of strong returns on the back of rampant equity markets. Managers are still being squeezed by long-term pressures that have fundamentally disrupted the industry.
One of the main drags has been the continual downward pressure on fees that began in the US and has spread to Europe. The rise in popularity of cheaper passive investing, where funds are designed to mimic an index, has forced traditional active managers to consider setting up passive products themselves and rethink their pricing.
Over the past two years, the amount of new investor money flowing into passive funds increased their total assets by 19 per cent, while active funds grew by just 1 per cent, according to Oliver Wyman, the consultancy. Active products still account for the vast majority — more than two-thirds — of managed money, but passives are catching up.
Amundi in numbers
Under management makes Amundi Europe’s largest asset manager
Of assets under management across Europe, about half the size of the US industry
Amundi’s share price, which has slipped almost 20% since May over concerns about its Italian operations
While a mountain of cash has flowed out of active products and into passives in recent years, the biggest cause of falling fees is active managers reducing their prices to be more competitive. Over the past three years global charges across all funds, including passive and active products, have reduced by 3 per cent a year, according to BCG. For certain types of funds, the average fees have dropped by more than a third.
“In the past decade institutional investors have become more sophisticated and are putting more pressure on asset managers over fees,” says Mr Fages. “Retail investors are being more sensitive on price and regulations are pushing them in that direction.”
Asset managers also face higher costs. Since the financial crisis, the fund industry has been hit by an avalanche of regulation resulting in increased operational spending. They are also engaged in an expensive technology arms race— from artificial intelligence and data mining tools to distribution platforms — in a bid to stay in touch with competitors.
Lower fees and higher costs result in squeezed profits. BCG calculates that the average asset manager’s profit margin has been cut from 41 per cent a decade ago, to 38 per cent today. While still a highly profitable industry, the reduction has had a profound impact on how managers allocate capital, say analysts. BCG expects margins to fall to 36 per cent by 2021.
Mr Fages says this fall in profit margins could force companies to close product lines, pulling out of markets and cutting jobs. Axa Investment Managers, the French active investment house, last month announced it would lay off up to 9 per cent of its global workforce in a move it said was partly driven by the need to invest in technology.
Oliver Wyman calculates that investment managers with more than $500bn in assets are more than twice as efficient as those controlling less than $100bn. However, the more complex the business, the more bloated its cost base. It means that European managers selling products in several markets cost up to 20 per cent more than US managers based only in North America.
According to Mr Perrier, these pressures have created an industry where the very largest are able to mop up assets, cut costs and reinvest in the pursuit of growth, while smaller managers can continue to offer specialist products at a premium. Those caught in the middle are struggling to compete.
“There is room for only two kinds of players,” he says. “Those like Amundi — to a certain extent, we are a small BlackRock — that will be asset gatherers, managing all asset classes with a global presence. But, you have room also for boutiques specialising in certain asset classes.”
In November 2015, armed with the new firepower provided by the IPO, Mr Perrier set about pursuing potential deals to ensure that Amundi did not get caught in that middle ground. One business he had long coveted was Pioneer Investments, the fund management arm of Italian bank UniCredit. Pioneer was another business that had not fared well in a market that favoured providers of cheaper investment products.
He had first tried to buy Pioneer in 2012, but the deal was scuppered when UniCredit changed its chief executive and Italian regulators pushed back against it. Mr Perrier returned with a new offer in mid-2016, had the deal agreed by the end of that year and the $3.7bn all-cash transaction was complete by July 2017. The tie-up was designed to save €180m within three years. It also took the group’s assets under management from €850bn to €1.1tn.
The deal made Amundi Europe’s biggest asset manager. By leapfrogging over Legal & General Investment Management it rose from 16th to eighth globally, entrenching it in the trillion dollar club. A year on, its assets stand at $1.4tn, making it the sole European asset manager in the world’s top 10.
However, a former Amundi executive warns that while the expansion up to now has been impressive, much of its organic growth is in lower revenue areas such as passive investing and fixed income. “I don’t know how sustainable that is,” he says. “You will see margins erode over time.”
He adds that though the deal helped Amundi grow in the lucrative Italian and US markets, as well as bringing in Pioneer’s high-performing investment teams, there are big cultural differences between the two companies that will need to be ironed out.
“Yves Perrier would say there is one star at Amundi and that is Amundi itself,” he says. “If you are a well-regarded portfolio manager at Pioneer, that’s not what you want to hear.”
Italian outflows have been blamed for the share price plunge in the past two months. However, Toni Dang, director of equity research at Barclays, says this is an over-reaction by the market to problems in Italy that have little to do with Amundi’s long-term strategy. “Amundi had a bit of a wobble in the second quarter, but it remains one of my top picks,” she says, adding that it is one of the most disciplined on cost of all European asset managers.
Mauro Baratta, vice-president of global distribution solutions at Broadridge, a consultancy, says the integration of the Pioneer business is still taking its toll on the business. There were scores of overlapping funds between the two businesses that needed to be closed or merged. “They are still going through this massive clean-up operation,” he says. “When you undergo this type of restructuring, sales will be affected.”
Amundi’s midyear results on Thursday will be scrutinised for signs of progress on that front.
Yet the former Amundi executive points to an equally big risk facing the company: while the rise has been driven by Mr Perrier, there is no obvious successor to the 63-year-old Frenchman. “I’m not aware of another asset manager that is as top-down. You take Yves out of the equation and the company does not function,” he says. “If he was to step down in a year or two there would be one hell of a succession battle.”
“Amundi is a remarkable European success story and the management deserve a huge amount of credit for that,” he adds. “Whether they can continue that trajectory will be a challenge.”
M&A Groups merge to survive against the index trackers
Between 2011 and 2016, there was an average of 142 mergers and acquisitions a year involving asset managers. That number spiked at 208 last year, according to investment bank Sandler O’Neill. The volume of assets managed by companies involved in those deals more than doubled from $1.3tn in 2011 to $2.9tn last year. Several of the biggest took place in Europe, as traditional investment managers tried to compete with more technologically advanced US rivals.
In late 2016, Anglo-Australian fund manager Henderson Group agreed to merge with US rival Janus Capital — home of veteran bond investor Bill Gross — in a $6.4bn deal that would create an investment house managing $331bn. Both groups, which specialise in active management, had struggled with the rise of technology-driven passive investment.
While Janus and Henderson painted the union — completed in May 2017 — as one aimed at growing their geographic spread and increasing their suite of products, analysts were more sceptical. They saw it as a defensive move by two struggling mid-size managers in a market that increasingly favours the very big or the very small.
“There have been profound changes in the asset management industry and people have started to question their business models,” says Andrew Formica, a 20-year Henderson veteran who negotiated the deal with Janus. “We feel we moved early on this trend and have positioned ourselves well.”
A second major merger was struck just months later when two Scottish neighbours — Standard Life and Aberdeen Asset Management — agreed to combine. Again, both parties were middling global asset managers struggling to cope with the increased appetite for cheaper index-tracking funds. The £11bn merger to create Standard Life Aberdeen was completed last June.
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