September 15, 2017 / 10:32 AM / a year ago

Breakingviews - Lure of scale drives Axa asset management union

LONDON (Reuters Breakingviews) - In Lake Wobegon, the fictional setting for Garrison Keillor’s “Prairie Home Companion”, all the children are famously above average. Such illogic is embraced by active asset managers, all of whom peddle the idea that they can consistently beat the market mean. The growth of lower-cost passive funds has exposed the flaws in that thinking – and lent new urgency to the search for cost savings.

Logos of France's biggest insurer Axa are seen on a building in Nanterre, near Paris, March 8, 2016

This dynamic has spurred Axa to consider options for its European fund management unit, according to Bloomberg, including a possible combination with French rival Natixis. A combination would create the euro zone’s leading asset manager with more than 1.5 trillion euros under management while offering scope to rip out costs and cross-sell products. It would also make sense for newish chief executive Thomas Buberl as he looks to restructure the insurance giant: Axa’s European asset management arm brought in less than 3 percent of gross group revenue last year.

Both businesses exemplify the pressure on conventional fund managers. Despite attracting net inflows last year, shrinking performance fees meant Natixis suffered a 5 percent drop in revenue at its European unit. Axa’s business saw a similar decline in combined commissions and fees from an expanding pool of assets.

Yet investors’ reaction to consolidation is mixed. Shares in Standard Life Aberdeen have declined by nearly 4 percent since the two UK fund managers completed their merger last month, even though the two have pledged to cut costs by 200 million pounds, equivalent to 11 percent of their combined expenses in 2016.

Rival Amundi – the product of a joint venture between French banks Credit Agricole and Société Générale – provides a happier template. Its shares have risen by 45 percent since it listed in 2015, and the group has lifted earnings by an average of 7 percent annually since 2012 despite margins shrinking each year. Following the acquisition of Europe-focused peer Pioneer earlier this year, Amundi pledged to squeeze out 180 million euros of annual cost savings and revenue synergies over three years.

Natixis’ European asset management division reports a cost-to-income ratio of 68 percent, a meaty 18 percentage points higher than Amundi’s. That suggests there is plenty of fat to be trimmed. Joining forces with Axa would bolster both companies’ bid to defy the law of averages.


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