Gerhard Fusenig, a member of the Aberdeen board and former top manager at Credit Suisse, gives his views on the passive trend in asset management, comfortable pension funds and the restructuring of GAM.
Gerhard Fusenig, Aberdeen Asset Management, in which you are a board member, is merging with Standard Life. Henderson Global Investors is coming together with Janus Capital, and Pioneer Investments has been sold by Unicredit to Amundi. What lies behind this wave of consolidation?
I would not describe it as a wave of consolidation. There are different drivers behind the three mergers you mention. Pioneer Investments, for example, was on the market for years. I would characterize the sale of Unicredit to Amundi as the implementation of a strategic decision – a move away from asset management.
Of course, there are mergers which come about through synergies, especially on the technical side, as well as through the merger of products. But all that does not prevent the clients from continuing to withdraw their money.
That has particularly been the case with Aberdeen.
Aberdeen has suffered an outflow of money for 15 successive quarters ...
... especially in products linked to emerging economies.
One reason for that was the lacking attractiveness of emerging markets three or four years ago. Later the sustained trend among investors was to invest passively. Now business logic is taking hold. The costs of running an asset management platform are rising as assets under management diminish.
«Considering their narrow margins, ETFs are expensive products»
In accordance with the shareholders, strategy has to be examined. It was clear to the Aberdeen board that that the only solution was to find a strong partner with whom broader strategic options would exist that would last several years. Anything else would have been a patch-up job.
Why Standard Life?
Joining together with Standard Life opens a new distribution channel in the pensions market (Defined Contribution) for Aberdeen. At the same time, Standard Life gains access to the Asian market. With Henderson and Janus, the driver was that both obtained new geographical sales channels – the US for Henderson and Europe for Janus.
The trend towards passive investments and ETF has lasted for quite a while now, and active managers can only look on relatively helplessly as they lose client money. Is that not a strategic error?
You shouldn’t make the mistake of comparing the ETF business with passive mandates. Because of their small margin of a few basis points, ETFs are expensive products: They are listed on the stock exchange and have to be marketed. They have to be continually recalculated and an issuer cannot afford to make any mistakes.
That means that a provider should have a very large platform of 100 billion francs or more for the ETF business to be profitable. For this reason, Credit Suisse sold its ETF business to Blackrock but held on to the passive mandate business.
But active managers can also offer passive mandates.
More and more providers are doing that. In this way, they are not achieving their preferred margins but they aren’t leaving the field open to competitors. Active managers are also increasingly turning to «Enhanced Indexing» or «Smart Beta».
«In the UK, index huggers have to lower their fees»
This is how they can introduce their specific asset management factors, such as a value approach. This way, they can introduce specific asset management factors, like a value-based approach. This additional service generates somewhat higher margins than a purely passive one.
But there seems to also be an awareness developing in the sector to pursue truly active management.
That is being demanded by the regulators. In Britain, «index huggers», in other words funds that only demonstrate a slight tracking error in comparison to the benchmark, are being forced to drop their fees. This means that active management is being newly defined.
Is a product range purely based on shares and bonds still sufficient?
No. A product range must by definition be wide enough to offer clients several products. In that case outflows from individual areas are less painful. The client leaves one particular segment but remains with the provider.
«Asset management delivers a good return for low capital costs»
Private equity should be part of the range of available investment options, as well as hedge funds, infrastructure investments, senior loans or smart beta.
Switzerland has two global players in asset management – UBS and Credit Suisse (CS). But at the same time, there is the impression that asset management does not play much of a strategic role there.
I don’t see it that way. UBS and CS have global market access and sales to match. They belong in the big league. Because they are universal banks, other considerations come into play to maintain asset management.
Such as?
They can offer their very wealthy private clients professional products from their asset management range. In additional asset management co-finances the whole data system for the securities business and delivers a good return for comparatively low capital costs.
There have also been rumors that CS might sell off its asset management arm.
If CS had a more relaxed capital situation, I would see it as a strategic option to advance into the top league of asset managers with an acquisition. The same applies to UBS. But I don’t think that is currently the case.
Do you anticipate a consolidation of the smaller players in Switzerland?
I don’t see any real need for that. Switzerland offers an advantage in its location: The asset pool is extremely large thanks to the private banks and pension funds. The banks, wealth managers and insurers offer excellent sales potential. At the same time this large market is being regulated.
«Smaller players pool European platform»
The chances of survival shrink significantly if an asset manager with low volumes wants to be present in too many markets. However, in this respect, I see the possibility that some smaller Swiss asset managers could join together on an operative platform to expand in Europe.
The asset manager GAM is currently under huge pressure. Massive amounts of client money have already been lost while costs are too high. A takeover candidate?
GAM had to separate from a long-term relationship with Julius Baer and lost client funds as well as a distribution channel in the process. The company has to reposition itself and find a balance between managed assets and costs, sharpen its profile as well as widen sales.
«That will only temporarily enhance profits»
Hard management decisions are needed to achieve that, as well as a certain rethink within the company. That is possible. GAM has a very good name in the market. Cost-cutting alone – as is currently being demanded by a large shareholder – does not bring long-term success.
Why not?
That will only temporarily enhance profits, and the increasing share price will allow the hedge fund to pull out with a profit. That is definitely not in the interest of long-term investors.
Gerhard Fusenig is on the board of the Scottish company Aberdeen Asset Management, which recently announced a merger with the British insurer Standard Life. Until the end of 2013, the 53-year-old was co-head of Asset Management at Credit Suisse. In this role, he also oversaw the sale of parts of the CS business to Aberdeen. He also currently serves on the board of the CS subsidiary Credit Suisse Insurance Linked Strategies.
