NEW YORK - Those consultants are beginning to look clever. The much-prophesied consolidation of active asset management appears to be upon us.
The macro drivers for these deals are broadly the same: active asset managers are under pressure from low-cost index funds, scale is needed to compete on price, and distribution matters more than ever.
The micro drivers of each merger or acquisition are a little more varied, with each firm hoping to solve a specific issue by teaming up with another shop.
Morgan Stanley Investment Management (MSIM) has $655bn in assets under management, while Eaton Vance has $507bn. The combined company will have about $1.2tn in assets.
Both firms have also been growing assets in the run-up to the deal, rather than bleeding them, as is often the case.
According to a presentation from Morgan Stanley, MSIM has had organic growth of 21% for the 14 quarters to the end of Q2 2020. Eaton Vance has had organic growth of 19%. This compares to an industry average of -3% for active shops, according to Morgan Stanley.
In the past decade, passive funds overall, including ETFs, have grown by a factor of seven, rising to $8.6tn from $1.3tn in assets, according to Morningstar. Active funds, by contrast, have grown by barely a factor of two, to $17.1tn from $7.8tn in the same period. The US stock market has increased by a factor of 3.6.
One major reason for an asset management acquisition is to give a firm a foothold in the ETF market. The Morgan Stanley-Eaton Vance deal does not appear to do this, as neither MSIM nor Eaton Vance has any real clout in this space.
While vanilla index ETFs are not on the table, what MSIM will get as part of the deal is Eaton Vance affiliate Parametric, which offers SMAs of customized indices. The strategies also offer overlay services, such as tax loss harvesting.
Cetera CIO Gene Goldman said the purchase of Parametric was one reason the deal made sense.
‘[There are] lots of potential acquisitions out there, but this one makes sense for three reasons,’ he told Citywire. ‘Morgan Stanley gets a stronger foothold in ESG products, a significant strength of Eaton Vance; it gets more high-fee products, as Eaton Vance has a huge presence in liquid alternatives; and it gets access to a customized investment solution suite via the Parametric business at Eaton Vance.’
Parametric’s offerings may prove to be a particularly good fit for clients of E*Trade’s stock plan business, which Morgan Stanley recently acquired.
The ESG business Goldman referred to is Calvert, a specialist shop founded in 1976 and acquired by Eaton Vance in 2016.
Unlike Parametric, which accounts for more 50% of Eaton Vance’s AUM, Calvert is a relatively small piece of the pie. ESG funds and ETFs have, however, never been more popular, attracting record flows so far this year.
Jeff DeMaso, director of research at Adviser Investments, agreed with Goldman that Calvert and Parametric were key drivers for the deal.
‘For Morgan Stanley, [the deal] is a way to access to trends in ESG investing and direct indexing,’ he said. ‘I think Calvert, which is big in the ESG space, and Parametric, which is a big player in the direct indexing space, are two pieces that Eaton Vance brings to the table that Morgan Stanley probably finds pretty attractive.’
Eaton Vance and MSIM also offer some similar traditional strategies.
‘If you just look at Eaton Vance’s line-up and Morgan Stanley’s lineup, there’s overlap there,’ DeMaso said. ‘How do those two line-ups come together? How do they complement each other? Those are some of the questions that give me a little bit more concern, whereas the Parametric and Calvert side are immediately more complementary.’
‘If we’re asking the question, you can be sure that the portfolio managers and all the analysts are asking the question: “Will I still have this fund? Will my role change?” And that’s just an added distraction. That’s going to take energy and time from what should be their primary responsibility of managing these funds.’
Areas (not including ESG and direct indexing) where the firms complement each other include: real assets, which MSIM offers but Eaton Vance does not; high yield bonds, where Eaton Vance is ahead of MSIM; and liquidity strategies, which MSIM offers but Eaton Vance does not.
Mergers such as these will always result in cost savings (some of which usually come via lay-offs) and these two firms have said they are targeting savings of $150m, or 4% of their combined expenses, when the deal is complete.
These cuts tend not to affect investment professionals initially, with operations usually bearing the brunt, but strategies in areas of strong overlap might be ripe for merging further down the line.
The overriding reaction to the deal has been one of surprise.
Greggory Warren, a sector strategist at Morningstar who covers Eaton Vance, wrote:
‘We did not expect to see a more traditional asset manager like narrow-moat-rated Eaton Vance being taken out by one of the investment banks, which have been far more focused on their brokerage and wealth-management businesses the past decade, with some even shedding their asset-management units in the aftermath of the 2008-09 financial crisis.
‘Narrow-moat Morgan Stanley, though, has been actively seeking to push its asset-management unit above the $1 trillion mark, with CEO James Gorman alluding to the company’s 2009 sale of its Van Kampen fund operations to Invesco as a mistake.’
The Van Kampen Investments sale was also cited by Joe Smith, founder and CIO of Parti Pris Investment Partners.
‘The benefit to Morgan Stanley acquiring Eaton Vance has more to do with reloading a lot of investment capabilities that they, frankly, sold off as a part of divesting their retail asset management business back in 2009,’ he said. ‘With the way that things have evolved in our industry, where advisors and retail investors are coming back into focus, the Eaton Vance acquisition provides them a reasonable set of investment capabilities in order to go out pursue that.’