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The Buy Side

Watch for the rise of the independent money manager Add to ...

We're going through another wave of consolidation in the asset management industry. Last summer, Sceptre Investment Counsel merged into Fiera Capital. More recently, CI Financial bought Hartford's mutual funds, Bank of Nova Scotia made an offer for DundeeWealth and AGF bought Acuity.

Will there be even more consolidation on the horizon? Before addressing the question, it's useful to first look back. When I started in the business in the early 80s, most professionally managed money was in the hands of big institutions, namely trust and insurance companies.

Fortunately for me, a shift was in progress toward independent firms owned by their employees. Investment counsellors, run by people who had built their records and reputations at the institutions, were winning all the pension mandates and were wooing wealthy individuals away from brokerage firms. With mutual funds going mainstream, independents like MacKenzie, AGF, Trimark, CI and Templeton jumped to the fore.

In recent years, we've seen the other side of the equation. The big institutions have been keen to grow their asset management businesses at a time when the founding shareholders of independent firms were looking for an exit strategy. This happy circumstance led to a decade of deals in which bigger firms swallowed smaller ones.

Banks were major players in this consolidation. It wasn't too long ago that the Big Five were considered to be second-tier investment managers. Indeed, when I was at Phillips Hager & North, I made a few of my partners angry when I was quoted in the paper as saying the banks were our competitors. It was an insult.

But the comment proved to be prophetic. Banks are now big players in mutual funds, private counsel for wealthy individuals, structured products and brokerage. Acquisitions accounted for some of the growth, but it came primarily from banks improving their investment capabilities and using their brute distribution force to sell products through branches and brokers.

This industry transformation has been so complete that it's become downright scary to be an independent. To compete with banks that have the massive budgets required to advertise on Hockey Night in Canada, firms need to have bank-like scale or something else going for them in terms of performance or product innovation.

This Time, It's Different

Will the acquisition trend continue? At the risk of again being called crazy, I think the tone of the next decade will be quite different. We're heading into a new phase of the industry life cycle, which I'll call "The 80s - Part 2." It will be a time when many new investment managers start up, and some small and mid-sized firms emerge from the pack.

Some of the factors driving the growth spurt will be the same as in the 1980s - available talent, entrepreneurial juices and the desire to escape slow-moving institutions. Are Dundee's stars, like David Goodman, Rohit Sehgal and David Taylor, going to be bank employees a few years from now? Not likely. Out of the great consolidation comes a band of rich, capable investment managers who still want a say in running the business, and will increasingly cherish the freedom that bank bureaucracy and tens of billions of dollars in assets doesn't permit.

Institutional investors will welcome these new, smaller money management firms because pension plans and consultants increasingly view the established players as being too big to take on more domestic assets.

Changed compensation structures will also encourage entrepreneurial managers to head out on their own. With the emergence of hedge funds, clients are used to paying performance bonuses in addition to a base fee. This compensation arrangement makes it enticing for portfolio managers to go out on their own because they don't need a large asset base to make a living.

So will there be more deals? Yes. Will the banks be the giants? No question. And will there be a renaissance in the asset management industry? Only if you believe that things go in cycles, size is an investor's enemy, and client returns are more important than shareholder returns.





 

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