Money walks out on the fund managers

By Euan Stuart Nov 29, 2005

The past 12 months have given a much-needed “shot in the arm” to the fund management industry, says Barry Riley in the FT. Global stock markets have risen (by 18% in dollar terms), and as a result so have the assets managed by the world’s 500 largest fund companies (up 13% to $48,800bn in 2004, according to consultants Watson Wyatt).

But while the recent rally in equities has provided respite to companies hard hit by the bear market that started in 2000, the good times may not last. Instead, it looks as if equity markets are getting more volatile, something that will soon expose the weaknesses of the many badly managed funds around, says Afx News.

This may spur a long-overdue shake-out in the industry, which is “ripe for rationalisation”. This summer, Axa’s acquisition of Framlington kicked things off and recently there has been bid talk around Anglo-US fund manager Amvescap, which is being stalked by US fund management group Janus. Canada’s CI Fund Management is also known to be looking for acquisitions: it made a failed attempt to get Axa in the summer and has just been trumped at the last moment in its bid for mutual fund manager Clarington Corp, says Laura King in The Deal.

Meanwhile, Amvescap competitor Schroder Investment Management is said to be thinking of bidding for UK-based Gartmore, which has, in effect, been put up for sale by its parent, the American insurer Nationwide.

But even if there is consolidation afoot in the industry, do fund management companies really make good investments? Not at the moment, says Pauline Skypala in the FT. Problems at listed investment management firm Henderson Global Investors exemplify many of the difficulties of the large houses. Much of their fund money is “walking out the door” due to a perception that they are stuck in a rut, with no clear focus, and have limited options for rebuilding the business in the wake of the bear market.
Indeed, even Henderson’s own chief executive, Roger Yates, believes fund management companies do not make good listed firms, since any spending on the business (to pay good new managers, launch new products or aggressively market older products), which might lead to falling earnings in the short term, is considered out of the question. According to Yates, the only reason for a fund management firm to list on the stock exchange is to “cash in”.

This is, of course, what John Duffield, founder of New Star Asset Management, has done this week. Shares in the fund management firm he founded five years ago started trading on London’s Aim market this week and soared 20% above their listing price on day one, making Duffield himself £170m richer on Wednesday than he was on Tuesday (though he says he doesn’t intend to sell a single share of his 20% stake). In its short life, New Star has become one the UK’s biggest retail fund managers, with £15bn worth of funds under management. But the firm is unlikely to benefit from muttering about consolidation in the sector: Duffield and his employees own 60% of the shares, so it won’t be easy for others to get a look in.

Cashing in on the “urge to merge”

Amvescap (AVZ) shares have been boosted recently by rumours of a bid by US fund manager Janus, itself the subject of takeover speculation, says Michael Jivkov in The Independent. UBS has upgraded the shares to ‘buy’ from ‘hold’ and Deutsche has upgraded then to ‘hold’ from ‘sell’. Yet with firm denials all round, says Patrick Hosking in The Times, shareholders would be wise to take advantage of the run up in the share price and “take some profit off the table”.

One worth looking at in more detail, however, is Schroders (SDR), says Geoff Foster in the Daily Mail. The firm is currently revelling in UK Plc’s “urge to merge”: not only is it often the subject of overseas takeover talk itself, but it is itself well placed to spend some of its cash pile on bidding for competitor Gartmore.

As for the newcomer to the market, New Star (NSAM), investors should be wary. While New Star has “every reason to be confident about its prospects”, at its current price “its orbit is just too close to the sun”, says Stephen Foley in The Independent. The shares have started off trading on a p/e of around 18 times, despite the fact that shares in most similar UK companies are on more like 15 times. New Star is growing fast, but the question is how long that can last: its rivals are seeing fund outflows of around 5% a year. Indeed, even allowing for a premium rating to reflect Duffield’s outstanding track record, “new investors will find much better value in one of the firm’s mutual funds”, says Foley.

Published in Tips & advice | More articles by Euan Stuart

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