Merger Frenzy is only part of the solution for property managers

The rapid growth of low-cost passive investment options and pressure on fees for active management have been pressing asset-management companies for years. One way to relieve that pressure is through scale-up, spreading costs across a broader revenue base and helping firms better compete with the likes of giant BlackRock.

There have been several high-profile asset-management mergers and acquisitions in recent years, including Invesco-OppenheimerFunds, Franklin Resources-Leg Mason, Federated-Hermes and Janus-Henderson. It’s a long way from reaching the scale of BlackRock: the largest of these merged firms, with more than $1.5 trillion in assets under management, is still much smaller than BlackRock, which approaches $10 trillion. has been

The stock’s performance has recently topped Invesco, Janus Henderson and Franklin Resources with or matches the S&P 500 financial index so far this year. Strong markets have helped managers drive asset growth and generate more revenue, and industry fund flows have been very strong. According to Morningstar, the first half of 2021 recorded the largest US inflows into long-term mutual funds and exchange-traded funds since at least 1993.

Deal discussions could also help stocks, especially with activist Tryon Fund Management which is heavily involved in the sector. Notably, one of the top performers among large financial companies in 2021 is Morgan Stanley, which this year completed its acquisition of Eaton Vance. Banks can make great acquirers of asset-management businesses. Those units bring in steady non-interest income and don’t consume a lot of capital, which makes them uniquely valuable to banks — even if fees are under pressure. They also have a natural synergy with the money-management arms of banks, which help deliver the products, although this has limits as regulators watch the conflicts closely.

Invesco shares rose more than 5% last Friday in a Wall Street Journal report about a possible alliance between Invesco and State Street’s asset-management arm. A combined entity with assets in excess of $5 trillion could be very large. However, the complexity of structuring a deal is a big question. It’s unclear to investors whether, if a deal were to go ahead, State Street would aim to hold a stake in a combined entity or just want cash.

Holding a stake isn’t always ideal for a bank: PNC Financial Services Group recently spun off its stake in BlackRock to reinvest in expanding core banking. Banks may generally be on the hunt, though their focus may be in key niches, or addressing issues such as socially responsible investing. Morgan Stanley cited Eaton Vance’s parametric optimization-portfolio business as a major highlight. Goldman Sachs agreed to buy sustainability-focused NN Investment Partners in Europe. JPMorgan Chase recently acquired forest management and timberland investment firm Campbell Global.

Meanwhile, Invesco shares gave up all their gains and more on Monday’s deal report this week, as investors took note of China’s risk. Invesco has recently recorded strong inflows into its China business and is expanding with institutional and retail clients. Asset managers are generally down so far this week, while financials have largely stalled.

From a market perspective, risk was clearly more related to a significant business. Scale helps — but perhaps not as much as strong flows or products in hotter regions, such as major geographic or environmentally and socially conscious investments. Asset managers have cut back on their work to prevent funds from coming in, no matter how big they get.