Practitioners predict Russian boutique M&A as earnings drop

A drop in earnings at over two thirds of Russian asset managers so far this year is likely to trigger an increase in M&A among boutiques, managers say, adding it would benefit the market, even if progress is slow.

A review of 48 Russian asset managers by a financial news source Kommersant found their cumulative earnings fell 10% this year to June compared to the same period last year.

Over two thirds of managers have suffered accounting losses, or at the least lower earnings.

Experts say the losses were caused by a decline in mutual fund assets, which is the main source of regular cashflow for the industry.

The outflows of business have exceeded RUB11bn over the last 12 months, according to Russian fund data provider InvestFunds.

The smaller managers have suffered the most, as they do not have the scale to deal with these outflows.

Anton Rakhmanov, managing director at Troika Dialog, expects this to lead to more consolidation among boutique management houses.

Simon Fentham-Fletcher (pictured), Moscow-based chief of staff at Renaissance Asset Managers, thinks this will be a positive trend. He says there are too many small fund managers in Russia, and consolidation among them would help to preserve and foster talent and to improve efficiency.

But the process has been slow so far, and cases have been far and few between.

At the end of last year, REGION Group, one of Russia’s leading debt investment specialists, took over Portfolio Investments.

Then, in February, TKB BNP Paribas Investment Partners in Russia inherited all the Russian assets of Pioneer Investment Management, as the firm chose to exit the market.

Rakhmanov explains that often there is no incentive for a large manager to acquire a small boutique because of the due diligence and costs involved.

Lower earnings are also bumping up the costs, as managers continue having to pay the same expenses. Managers’ primary focus is preserving the business that they already have, not building in new capabilities.

But even as earnings drop, the total assets under management in the industry are up 17% since last year.

The driver for this has been pension money. Russian investment houses are managing proportionally more pension money now than ever before.

Russia’s independent ratings agency Expert RA reported a steady increase in pension assets as a proportion of Russian investment managers’ total assets last year. It expects this to continue.

But this is not wholly positive for asset managers.

Managers typically only earn a performance-based fee on pension assets, so the mere fact they gain these assets does not benefit them.

Furthermore, the managers only receive the fee annually.

Mutual funds will pay them more often.

At the same time, longer term pension investments tend to be more conservative than mutual fund strategies.

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