The announced merger of Standard Life and Aberdeen Asset Management highlights the growing polarisation of the investment management industry between large, global, diversified groups and smaller, specialist, active managers, Fitch Ratings says.

In this environment, mid-sized firms suffer the most from industry pressures and further consolidation is likely as investment managers seek to diversify their business mix and improve efficiency. One component of intense competition is the growth of investment management operations at life insurers such as Standard Life, which have been attracted to the third-party investment management business by low capital requirements and pension reform.

READ MORE : Standard Life and Aberdeen Asset Management confirm merger talks

 Investment managers have entered a race for scale and efficiency as a shift among clients towards passive and low-fee products weighs on margins and as firms plan significant investments in new technology. At the same time, there has been a surge in interest in alternative investments, particularly real estate, which creates a competitive disadvantage for mid-sized firms that have neither the scale of larger players nor the specialisation of some smaller firms.

Mid-sized firms risk being left behind and more deals like Aberdeen’s merger with larger rival Standard Life, or the combination of Henderson Group and Janus Capital are likely. Both deals will help diversify business, client and geographic mix and increase efficiency, while both face similar challenges from the need to retain assets and key personnel and manage cultural differences.

Other life insurers with significant investment management arms include Allianz, L&G, Axa and Prudential. The lower risk profile of savings and investment products compared to traditional life insurance business, and correspondingly lower regulatory capital requirements, have been a major driver of growth. Investment management operations have also benefited from the long-term shift from defined-benefit to defined-contribution pension schemes.

Though investment management can provide diversification of risks and sources of profit for insurers, fee income is dependent on the manager’s total assets under management, which is itself a function of investment performance and net flows. Ensuring a wide range of product offerings and consistent fund performance are key factors in the long-term success of life insurers’ investment management operations.

We affirmed Aberdeen Asset Management’s ‘A’ rating on Wednesday, 8 March following the announcement of the merger with Standard Life. This reflects our view that the improved scale and diversification of the combined group’s enlarged franchise will mitigate higher cash flow leverage of the group compared with Aberdeen’s current leverage as well as execution and strategic risks related to the deal.

Source: FitchRatings