On buy-side size & the Pioneer - Santander merger
Anthony Peters on how big is beautiful… for some.
Overnight news which involves neither Greece nor China is rare but this morning we can look the prospect of the merger of Unicredit’s and Santander’s asset management business. On the face of it, it makes sense to take two under-scaled businesses of similar size and to combine them in search of critical mass and economies of scale.
Were I sitting in the ivory tower of major bank’s boardroom and were I looking at the figures, I’d most probably conclude that bigger is better. But I don’t. I sit on the sharp end of the markets where liquidity ranks along with horse drawn carriages and fax machines as quaint reminders of a simpler past. While the sell-side of the financial world is rapidly being dismantled after the heady 1990s and 2000s with their trend over-consolidation in the race to be the biggest, best and most global of houses took its toll.
We this morning have an out of control Deutsche Bank digging into its back pocket to find US$2.5bn to pay its rate rigging fines and for HSBC’s AGM which take place in London and which is set to see a serious shareholder revolt after the Geneva scandal.
The former is already looking to ditch its retail business – it did it once in the past when it split of the high street business in the shape of “Bank 24”, only to pile back in by acquiring Deutsche Postbank – and to focus on high value-added wholesale banking. The latter, not so long ago the “world’s local bank”, is talking about down-scaling left, right and centre as it has become clear that the empire had become too large for anyone to be able to oversee, let alone manage.
But sauce for the goose is obviously not as yet deemed to sauce for the gander. While the sell-side is under unrelenting attack for getting too big and too unmanageable, the buy side is skipping along as though nothing had happened. As a colleague of mine commented, when hearing of the merger: “Just imagine trying to put on a 2% exposure when you’re twice the size”. The joint Pioneer/Santander Asset Management (it will consolidate under the Pioneer brand) will have assets under management of around €400 billion which moves it up to somewhere around slot 25 in the global league table.
From an individual portfolio manager’s perspective, big is beautiful. It makes you more important as premium clients enjoy premium service and you move up the ladder when it comes to invitations and allocations. But this position also makes it that much more difficult to get through the door when all are headed for the exit; that, alas, is a problem for another day.
I have spent quite a lot of time trying to assess the impact that the percentage of new issue fill has on the performance of a benchmark fund. The more you get at issuance, the less you have to buy in the secondary market in order to get to your benchmark-neutral exposure. The bigger you are, the better your allocation is likely to be. Thus, the small guys will always struggle to match the big funds’ performance and in a bull market this will impact the attractiveness to consultant actuaries. I have referred to this in the past as the centripetal effect where performance attracts new funds which further the skews performance in favour of larger houses. Even with identical asset allocation, the smaller investor will be losing out.
When the market turns – and turn it will – the smaller fund manager will, however, be more nimble. “One million done and may I please have an order on the other thirty seven million…” is not the same as “One done and may I please have an order on the other million”. The defensive move for those who have their money managed is, in my humble opinion, to favour smaller players and to diversify one’s investment not only by asset classes but also by asset manager. On that basis, I’d not be too excited by the new, bigger Pioneer.
Yes, Greece can
Meanwhile, the indications that Greece will be let of the hook after all and that the rest of Europe’s tax payers will end up footing the bill are increasing. If this is going to be the case, why all the months of theatrics? Either the politicians think taxpayers are stupid enough to buy the show or they really are that stupid. I reserve judgement but couldn’t we have got here much sooner? That is, if my memory serves me right, 3:0 for Greece in the can kicking competition.
Meanwhile, there is much talk of foreign capital outflows out of the Chinese stock market. With the second big property company about to default on its bonds, is that a surprise?
There we are; that Greece and China dealt with.
Alas, it is that time of the week again. All that remains is for me to wish you and yours a very happy and peaceful week-end. As the time-line towards the bicentenary of the Battle of Waterloo progresses, tomorrow, April 25th marks 200th anniversary of the completion of the 7th Coalition, the Treaty of Vienna, in which all powers agreed to provide 150,000 troops each to an army to face the French.
Only Britain failed as it had most of its own army fighting the French in Canada. Note, incidentally, that the French Canadians never had anything to do with Napoleon and that their only real flirtations with the Old Country were during the de Gaulle period in the 1960s. Fifty-five days to Waterloo.