Fund managers: middle of the road is where you get steamrollered

It will be years before we know how many fund managers the world really needs. In the meantime the best answer is “fewer”.

The rise of passive investment groups is unstoppable. Traditional fund managers have two survival options: bulk up or specialise. Evidence of those imperatives arrived on Tuesday with results from three UK fund managers: Abrdn, St James’s Place and Man Group.

Abrdn is the largest of the trio. But it is also the weakest. Economies of scale were cited as a justification when Aberdeen Asset Management merged with Standard Life in 2017. But the integration proved tricky. The business remains an investment generalist. The shares have fallen 45 per cent.

Man Group and SJP are smaller. But they are specialists. Hedge fund group Man mostly runs “liquid alternatives”, typically quantitative funds. SJP is essentially a wealth manager charging well-off clients high fees for high service levels. Shares in both groups are higher than in 2017 and outperforming peers.

Falling markets provide an acid test. Abrdn’s assets under management of £500bn fell 8 per cent last year. Net outflows were £10.3bn, mostly from active equity funds. These products remain highly exposed to passive competition. Abrdn is pushing into more profitable areas. It has acquired retail investment platform Interactive Investor and is beefing up its alternatives range.

The group appears subscale compared with big index trackers and their ilk. As a rough rule of thumb, some $1tn in assets is a criteria to compete as a generalist.

Despite outperforming over six months, shares trading at a market value of less than 1 per cent of AUM are very cheap. This would make it a takeover target if would-be acquirers had the appetite.

In contrast, SJP continues to vacuum up assets as it brings new self-employed advisers into its fold. Net inflows of £10bn partly offset market declines. Assets fell 4 per cent to £148bn last year. Man attracted net inflows of $3.1bn with assets closing down by 4 per cent too, at $143bn.

Valuations reflect the better prospects of specialist managers; Man trades at almost 3 per cent of client assets. A near 5 per cent valuation for SJP reflects its ability to keep beating peers on inflows.

Fund management is technically complex industry. But a single phrase sums up current trends: go big, go niche or go home.