But what is behind this move for consolidation? PH&N (No. 4 in last year’s Top 40 Money Managers Report) was certainly in a position to reject RBC’s offer, as it had done previously to other would-be suitors. And, as the owner of the No. 10 spot, Addenda was also in a comfortable position.
Sizing Up the Competition
The answer seems to lie in scale. John Montalbano, president of PH&N, explains the reasons behind the February deal in terms of client demand for increased customization.
In September 2007, PH&N conducted a strategic overview and found that, as the landscape was changing to more sophisticated and customized solutions, its clients’ needs were shifting to a more global outlook. “We were pleased with the resources and the future outlook of our firm, specifically with respect to core mandates in equities and fixed income,” says Montalbano. “But we did recognize that clients were continuing to look to us for further customization of portfolio needs.”
Montalbano says the overview resulted in a wish list that included expertise in global bonds and emerging market debt and equities, U.S. high-yield credit and currency management, expanded non-core equity platforms, and absolutereturn- driven strategies such as hedge funds and infrastructure. Despite this tall order, he says the firm was prepared to invest as necessary to get there and was surprised at the timing of the RBC offer. “Coincidentally, and entirely coincidentally, RBC approached us in October with a very detailed outline of how they could help our institutional clients,” he explains.
Previously, PH&N (formerly an independent money manager) had spurned all offers of joint ventures and acquisitions out of concern for its clients. “Frankly, if [potential buyers] can’t come to us and tell us how it would be in the best interest of the client, we weren’t going to spend any time on it,” says Montalbano. “To RBC’s credit, they spent a considerable amount of time thinking about this very issue.”
After reviewing the investment platforms at RBC Asset Management and RBC Capital Markets, Montalbano and the firm realized that there were synergies between the two companies that could be harnessed. “When we took a look at it, we were overwhelmed [by] how successful their investment platform has been, but it’s also been successful in very diverse ways,” he says. “Many of those [ways] were directly in line with the key needs we have over the next five to seven years.”
This is not the first time that RBC has looked to move into the money management market. In 1993, RBC bought a large institutional money manager in Royal Trust (RT), but had trouble incorporating RT’s institutional business into its model, eventually selling it to UBS in 2001. In 1999, RBC paid $159 million for high net-worth manager Connor Clark Private Trust, but shortly thereafter witnessed an exodus of clients and staff.
It looks as though RBC has learned from its previous experience. It is using 27 million RBC shares to purchase PH&N, which not only provides a more taxefficient method compared to the cash it put up for Connor Clark, but should also prove to be a more cohesive element in retaining PH&N staff over the long term. RBC says it will continue to use the well-respected PH&N brand—a marked departure from the Connor Clark acquisition, in which the name was dropped within a year, ostensibly in an effort to consolidate the RBC brand.
RBC’s efforts to avoid repeating its past mistakes are also evident in the decision to keep PH&N staffers in senior positions. PH&N president John Montalbano will become chief executive officer (CEO), Hanif Mamdani will lead the alternative investments branch, and Damon Williams will remain head of institutional management.
Observers say the real test will come over the next few years as contracts expire and fund managers make the decision to stay or leave. National Bank’s 2002 purchase of Altamira Investment serves as an example of what can go wrong in this respect, as the deal resulted in the prompt exit of portfolio managers following changes to the rules regarding how they could manage money.
So if an independent stalwart such as PH&N finds it advantageous to sell, what does that mean for small- and mid-size firms?
There is a growing consensus in the industry that money managers need to focus on one of two areas: a global, diverse reach or a niche boutique market position. “Money managers are struggling to remain relevant in the Canadian market,” says Janet Rabovsky, practice leader, investment consulting, with Watson Wyatt Worldwide. “Previous reports said you need to be very large multidiscipline or you need to be boutique, and being in the middle is nowhere.” Both PH&N and Addenda found themselves in this middle ground, prompting unions with institutions that possessed global reach and a diverse product portfolio—key areas in which they were lacking.
While merger and acquisition (M&A) activity in the Canadian money management market is nothing new, the jury is still out as to whether or not it is a trend. More than a dozen acquisitions of money managers by large financial institutions in 12 years may outwardly appear to be a trend, but some observers say it’s important to look at the reasons behind the deals.
Tony Arrell, CEO, Burgundy Asset Management, believes that the latest M&A activity is part of a larger pattern. “The big financial institutions are very interested to do these sorts of things. I think they perceive that the money managing business is a very good business. And I think they have been frustrated that they haven’t been able to build more of it up themselves. Some of them have, but they’d like to do it faster.”
Jean Guy Desjardins, CEO of Fiera Capital, disagrees. “It’s just one of these things that happen once in a while,” he says. He points out that it’s not like the circumstances in 1986-87, when commercial banks made the decision to position themselves in the brokerage business. “Every bank had to jump on the bandwagon and not miss that one—in hindsight, for the right reasons,” he says.
What a difference a year makes. Although Caisse de dépôt et placement du Québec has retained its No. 1 spot in the Top 40 Money Managers list with a similar growth rate to last year, only one firm in the top 10 (Connor, Clark & Lunn Financial Group) showed better growth in 2007 than in the previous year. Indeed, overall asset growth is down, and losses are prominent.
Seventeen of the top 40 firms posted losses as of Dec. 31, 2007, compared to only seven last year. The top 40 total assets under management are up $17.2 billion (or 2.4%), compared to growth of 14.6% last year. So, is it a bad time to be a money manager? It depends on whom you ask.
Top 40 newcomer Acadian Asset Management leads the pack with an impressive asset growth rate of 47.4%—more than double that of the next best performer, Bentall Capital, with 20.6%. Coming in third place is Morguard Investments Limited, with 18.3% growth.
According to Churchill Franklin, executive vice-president, with Acadian Asset Management, the company’s growth is attributed to being in the right asset category (global equities, global 130/30 and long/short strategies) and increased staffing focus in the Canadian marketplace. “With all due humility, if you get the asset category right, some strong performance and a good marketing effort, the rest works pretty well,” he says.
Franklin credits Acadian’s international posture with helping to weather the volatile markets. “A large amount of our assets are non-U.S.-based, so we’re very global in nature and global in our marketing efforts,” he explains.
Bentall Capital’s chief operating officer, Malcolm Leitch, credits its growth to an increase in the value of existing portfolios and increased allocations to real estate from pension funds. “Pretty much across our portfolio, we’re seeing appraisal lifts throughout 2007,” says Leitch. “There’s also additional equity that is being allocated to real estate from pension funds, and we’ve been successful in investing some of that.”
On the downside, Capital Guardian suffered a loss in assets of 38.9%. Legg Mason Canada was second with 30.1%, and Northwater Capital Management wasn’t far behind with a loss of 25.2%.
Michelle Savoy, president of Capital Guardian Canada, says every market environment presents both challenges and opportunities. “Things appear particularly challenging now. Capital’s focus on long-term intrinsic value has not been rewarded through the current market dislocation, but our investment philosophy remains intact,” she says. “In our global portfolios, we’ve been broadly overweight in Japan and have been underweight in financials. But like many others, [we] did hold some financials that came under considerable pressure.”
Brian White, vice-president, with Aon Consulting, says the current money management landscape is most likely a combination of market-driven forces and movement of clients from one manager to another. “It’s not necessarily a bad time for the industry; it just depends on the manager,” he says. “Retail investors have a tendency to pursue performance, whereas institutional investors are much more focused on the fundamentals of the organization and the team. And the fallout of good fundamentals is strong performance.”
“It could be a trend,” says Rabovsky, “if you believe in the consolidation of the industry.” She suggests that this consolidation is related to the idea that Canadian plan sponsors are now thinking about how they want to structure their assets, possibly reducing their Canadian equity allocations in favour of foreign equity and considering other alternatives.
“Depending on the types of products you offer, you may be seeing your clients rebalance, maybe moving from core bond to core plus bond,” adds Rabovsky. “I think it’s a very interesting time in the Canadian marketplace, and it will be interesting to see how the organizations respond.”
Gregory Chrispin, president and managing director of State Street Global Advisors in Canada, agrees. “What we’ve seen from our position is that there has been a continual reallocation from Canadian domestic equities to global and emerging market equities,” he explains. “Traditionally, what we’ve seen in Canada is that some of the independent money management firms tended to be very concentrated in those areas. So if now you don’t establish distribution alliances or don’t have the opportunity to offer those products to your clients, then you will find it very challenging.”
Montalbano sees a larger pattern in the industry. “I think the trend that’s started is clients asking for customized solutions, and either you have the resources to do it or you don’t,” he explains. “The result of that is, you’ll find money management firms will have to determine how they’ll define themselves going forward.”
Questions of a trend aside, many industry insiders don’t expect consolidation to end any time soon. Michael Quigley, senior vice-president, distribution, with Natcan Investment Management, sees no let-up in the short term. “Our industry is about consolidation, and consolidation will continue,” he says. “If current market conditions continue for a few quarters, chances are, consolidation will accelerate.” Rabovsky agrees. “We could see some consolidation; it wouldn’t surprise me. I think the status quo won’t stay.”
Assuming that the experts are correct and consolidation continues to occur, does the independent money manager have a future? The short answer is, yes.
“The market is very fragmented, so there will always be a place for independents,” says Desjardins. He points to the fact that PH&N—by far the largest independent on the Canadian scene—has a market share of less than 10%. “When you have a market that’s highly fragmented like that, it creates a lot of room for independents.”
“There will be a place for independents in Canada, as well as globally,” says Quigley. “I think what we’ll see is a return to the ultra-specialization, where you’ll have the independents operating within niches.”
Warren Stoddart, managing partner of Connor, Clark & Lunn Financial Group (another independent), agrees, but warns that the industry is becoming more competitive with each passing day. “Life is getting more difficult [for independents] and continues to do so,” he explains. “For those who are mono-line businesses focused primarily on Canadian asset classes, the size of the pie is shrinking while costs are rising. So if you have not been able to make the changes to your business necessary to compete in the more demanding environment, it is going to be more difficult to maintain client confidence.”
Montalbano echoes Stoddart’s remarks. “It’s a highly competitive business, and independent money managers typically serve a specific niche in the marketplace,” he says. “I think the trends we’ve seen historically are not going to change in the future; it’s just how organizations wish to define themselves in meeting client needs.”
The RBC/PH&N deal has not only shifted the money manager landscape, but it may also have given other independents cause for reflection. Those firms that identify with PH&N’s situation prior to the sale might be reassessing their positions, assuming that their clients are asking for the same customized global investment solutions. The current low interest rates have banks looking for ways to increase their profits, so established independent money managers may present an attractive opportunity.
The experts say: it’s time to go global or go niche. Those that do neither may find themselves left out in the cold.
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