Morgan Stanley deal signals race for scale at fund managers

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Morgan Stanley’s $7 billion purchase of Eaton Vance marks the latest wager that finding a big partner is critical to survival in the asset management industry.

With fees squeezed by cutthroat competition and a shift to passive fund management, firms are racing to expand their reach. Activist investors are also on the prowl, which could lead to more deals in the near future.

“It is getting chilly out there for fund managers,” Ben Phillips, a principal at Deloitte Consulting’s Casey Quirk unit, said in an interview. “Finding ways to stand out is increasingly a critical consideration.”

The value of deals in the asset management and wealth management industries during the first half of 2020 rose to $19.7 billion, up 47% from the same period a year earlier, according to an analysis by PwC. Still, the number of announced deals in that span, 113 in all, was unchanged.

‘Shrinking universe’

“It’s an incredibly shrinking universe,” said Elizabeth Nesvold, head of asset and wealth management investment banking at Raymond James in New York. “There’s just way too much pressure to deliver as a public company, quarter by quarter.”

The pressure on small and medium-size managers comes from the very top of the industry, which is dominated by index fund giants BlackRock Inc., which oversees about $7.3 trillion, and Vanguard Group, with more than $6 trillion.

Nelson Peltz’s Trian Fund Management built up stakes in Invesco and Janus Henderson Group, filings show, potentially gunning for the firms to pursue additional consolidation. The activist fund noted how the dynamics of the fund management industry are changing, with size and diverse product offerings becoming more important.

Eaton Vance itself is the product of dealmaking. It bought Pelican Investment Management in 2011 and Clifton Group Investment Management the following year. It got into the direct indexing business — creating custom portfolios for clients — through its deal for affiliate Parametric in 2003. At the time, Parametric had about $4.7 billion in assets under management. That has grown to almost $300 billion.

Parametric’s specialty in customized products helps distinguish Boston-based Eaton Vance from competitors, according to Edward Jones analyst Jim Shanahan.

“They have a fairly unique business,” he said.

Eaton Vance recorded net inflows for 24 straight fiscal years, according to its 2019 annual report. That compares with competitors like Invesco and Janus Henderson, both of which have struggled to stem outflows in recent years.

In the early days of the pandemic, T. Rowe Price Group Chief Executive Bill Stromberg predicted that accelerated consolidation could result from the economic fallout that ensued. In a May report, Boston Consulting Group said the asset management industry in North America, which oversaw about $42 trillion last year, was primed for more mergers and acquisitions in the wake of the health crisis.

Even before COVID-19 ravaged the globe, major mergers were underway. Franklin Resources acquired Legg Mason this year, and Invesco completed its purchase of OppenheimerFunds in May 2019.

“We think the M&A wave is not over,” Credit Suisse Group analyst Craig Siegenthaler wrote Thursday in a note to clients.

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