(Bloomberg Opinion) -- In October 2016, Henderson Chief Executive Officer Andrew Formica was busy merging his firm with Janus Capital in a bid to join the fund management industry’s $1 trillion club.
“Others will say they wish they’d done it,” he said. Fast forward to his current job running the much smaller Jupiter Fund Management Plc. “Big isn’t necessarily better,” he now says.
The mergers that produced Janus Henderson Group Plc and Standard Life Aberdeen Plc were supposed to usher in a wave of consolidation in the European fund management industry. That hasn’t happened – and the dismal performance of the two companies since is proving to be a deterrent to any peers thinking of expanding through acquisition.
On Wednesday, SLA reported that customers pulled 15.9 billion pounds ($19.4 billion) out of its funds, more than the 13.4 billion pounds analysts had expected.
While rising markets boosted performance to drive assets under management up to 577.5 billion pounds by the middle of the year, they are still 5% below their level at the end of 2017. Scale, it seems, isn’t sufficient to attract customer flows.
Last week, Janus Henderson reported its seventh consecutive quarter of withdrawals. Assets under management fell to $359.8 billion by mid-year, down from $370.1 billion a year earlier.
Those outflows come as performance has suffered. By the end of June, just 66% of the firm’s funds had outperformed their benchmarks in the previous year, compared with 72% on a three-year basis and 80% over five years.
It seems fair to speculate that the distraction of combining two firms has taken a toll on the portfolio managers. Melding two different cultures is never easy. That may well explain the reluctance of rivals to merge.
For sure, Jupiter’s Formica is cutting his cloth according to his new situation. In his current berth he oversees about $56 billion. But it’s not just the smaller asset management firms that have been put off by the less than stellar experience of Europe’s two biggest fund mergers.
Asoka Woehrmann, CEO of DWS Group GmbH, was asked on an earnings conference call a few weeks ago about his firm’s ambitions to become a top 10 player in the industry. “How many mergers happened in this industry and after three years, you are sitting asking the reason why?” he replied. “This is exactly what we are going to avoid.”
With about $805 billion of assets, Woehrmann acknowledged that it would take a “transformational deal” for DWS to get into the top tier, where firms need at least $1.3 trillion of assets. But he stressed the need for patience. “To be big is not our main target,” he said. “Increasing shareholder value is the most relevant target.”
That certainly hasn’t been the experience of the owners of SLA stock.
Mergers may still happen. Deutsche Bank AG, which owns about 80% of DWS, still seems keen to find a partner for the asset manager. UBS Group AG is similarly anxious to do a deal with its funds arm. And now that GAM Holding AG has drawn a line under its troubles, a suitor may be tempted to bid for it.
But in fund management, the firm’s most valuable assets walk out of the door every evening. SLA and Janus Henderson are stark reminders of the difficulties that the industry still faces – and that mergers are no panacea.
(Corrects spelling of Janus in first paragraph.)
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Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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