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Shaking the funds management tree

Middle-sized funds management firms are at risk as the trend for rationalisation accelerates.

Sunday, November 30th 1997, 12:00AM

by Philip Macalister

It's feeding frenzy time in the funds management industry as the much-talked about rationalisation of players picks up speed.
The number, pace, and size of some of the recent or impending transactions shows that funds management businesses are in play and no-one is left out of the action.
Just look at what's been happening. AMP Investments last week picked up National Bank subsidiary (and former industry star) Southpac Investment Management, GPG's bidding for Tower (which has implications for Tyndall which is 51 per cent owned by GPG and New Zealand Guardian Trust which is a Tyndall subsidiary) and across the Tasman National Mutual and MLC look like getting together to form a $57 billion funds management and insurance company in Australia and New Zealand.

Looking back 18 months Sovereign acquired MetLife's business, Mercantile Mutual picked up Armstrong Jones, Prudential bought NZI Life and Sun Alliance (now Royal SunAlliance) bought the Oceanic insurance bond business.
Added to the frenzy is the likelihood that the Public Trust Office will soon come into play, and the fact that firms such as Royal SunAlliance and Guardian Assurance are on the prowl for acquisitions.
Here in New Zealand there has been another trend which is tied into the rationalisation revolution. That is the decision by some of the Australian domiciled managers to pull back from the market.
First we saw Rothschild Asset Management close three of its Five Arrow funds promoted in New Zealand. The casualties being its $9.4 million International Bond fund and the $5.8 million Asian Opportunities fund, both which have been heavily promoted in New Zealand, plus the Five Arrows Monthly Income fund.
Rothschild said the funds have failed to draw adequate support in the New Zealand market.
The latest acceleration of this trend is a strategic decision taken by EquitiLink to exit the retail business internationally so it can concentrate on its wholesale operations.
Closing down the retail business is a bold move by EquitiLink, but one which signals an inevitable trend for the industry.
EquitiLink's New Zealand representative Paul Lyons said the retail business is becoming uneconomic for small and medium sized fund managers.
"It's a hard road to hoe," he says. "Players in the middle ground are struggling to make money."
What's happening is that the big are getting bigger, the small, niche players will continue to operate successfully in their markets, and the middle-sized players will be the vulnerable ones.
It's a bit like being a fish in the ocean. The big fish are gobbling up smaller prey, and the small, niche players are like the suckerfish. They will hang in there and get on with their role in life.
This is borne out by comments from AMPI managing director Roger Greville and Lyons.
AMPI's rationale for buying Southpac is that to be a serious player in the funds management business a firm has to have the appropriate economies of scale.
Greville says size allows a firm to employ sufficient in-house resources to run the business properly and drive down costs.
He agrees many of the middle-sized fund management firms are unprofitable operations and rationalisation is inevitable.
That becomes clear when the New Zealand managed fund industry is lined up against those in Australia and the United States.
In New Zealand there are 575 retail managed funds and the average size is just $19.6 million. However in Australia there are 1589 funds and the average size is A$67.9 million while in the US there are 6200 funds and the average size is US$395 million.
Put another way there is, in New Zealand, one savings vehicle for every 600 wage and salary earners.
"That is simply too many," National Mutual Funds Management managing director Michael Bargholz says.
Greville's view is that further rationalisation will happen and there will be quite a split in the market between big and small firms.
That's a view shared by Lyons. He says while the big managers will continue to get bigger, there will always be a place for the smaller, niche boutique operators like Coronet Asset Management and Equitable Life.
Equitilink's decision to pull back from the retail market is aimed at becoming a niche player on the global scene where it will play to its strengths in the resource, Australian equities and international bonds areas, particularly in Asia and Australia.
EquitiLink has about $5.3 billion under management and aims to reach the $10 billion mark by 2000 then "basically close the doors."
"We want to play to our core strengths," Lyons says. "We can't be all things to all men."
Across the Tasman there have been similar examples of where this trend is leading. Recently funds management giant Barclays Global Investors, which has more than $600 billion under management, slashed its fees when it launched a new range of retail products.
Barclays' chief executive officer, John Bowers, says the trend for lower fees will continue as big, global funds managers used their size to cut costs.
"There's no doubt fees are coming down," Bowers says. "That's happening as managers like us are getting more efficiencies. This is the ultimate global business."
Bowers predicts fee pressure will accelerate further rationalisation in the funds management industry.
Lyons says globalisation of the funds management industry is a major trend which will continue.
"If you are not one of these global funds management companies or you are not a boutique funds management firm you have got an identity crisis."
Lyons says further rationalisation in the funds management industry is inevitable, what surprises him is how long it is taking to happen.
He says since it became known EquitiLink was making this strategic move a number of unsolicited offers had been made for the firm's book.
Lyons says it's not for sale, but the fact that offers are being made is proof there is an appetite for management firms to acquire business to help reach critical mass.
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