The number of newly authorised UK asset management firms in 2020 dropped to less than half those authorised in 2016 as the sector suffered from the dual challenges of leaving the EU and the pandemic.
Lawyers and industry commentators have warned that this could be detrimental to end investors particularly when coupled with the consolidation in the market.
A Freedom of Information request submitted by Investment Week to the Financial Conduct Authority (FCA) showed there were 97 newly authorised asset management firms last year, while in 2016 there were 221.
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The numbers so far this year do not show signs of a strong recovery post-pandemic at just 40 new authorisations as of 8 June.
"Any slowdown in launches could be a concern," said Kirstene Baillie, partner at law firm FieldFisher. "It is new launches that can bring new life to the marketplace, with the opportunity for more entrepreneurial asset managers or the chance for new managers to develop their own new styles, and products."
Delving into the detail
The figures from the FCA are substantial, with 1,145 new asset managers authorised between 2010 and 2016. For context, in November 2016 in its Interim Report on the sector, the FCA said there were 1,840 asset management firms within the UK.
This figure includes passives and smart beta providers, which saw a substantial jump during those years and may have tapered off in more recent years.
Passive investing started in the 1970s according to a paper from University College London (UCL) but did not become popular until recently.
At the end of 2010 there was £48.9bn in UK domiciled passive funds, but this has since jumped to £351.6bn in May 2021, according to Morningstar data.
The passive market now makes up about 29.5% of the overall AUM and was just 10% in 2015, according to the UCL paper and recent figures from the Investment Association (IA).
However, given the decline in authorisations from 221 in 2016 to 160 in 2017, commentators find it hard to ignore the significant impact of Brexit.
Ryan Hughes, head of active portfolios at AJ Bell said it is "no surprise to see the fall start after the Brexit referendum which left so much uncertainty overhanging the UK economy and may well have dissuaded new entrants from coming into the market".
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Jan Gruter, partner at law firm Addleshaw Goddard, agreed and said: "Financial firms have been in a state of flux ever since the UK voted to leave the EU.
"Asset managers in particular, who relied on passporting to execute business across the continent, have been awaiting the outcome of the Brexit negotiations with anticipation."
Five years after the Brexit decision and industry bodies are still campaigning to ensure the ongoing competitiveness of the sector.
Last week (1 July) the IA published its wish list for the sector urging the government to have a "coherent longer-term strategy".
Gruter is hopeful that Brexit will not cause a sustained impact on the sector and the drop in authorisations could be considered "a hallmark of deferred decision-making".
"Our clients are clear: the UK remains a vital centre for fund and asset management activity and we are unlikely to see this sentiment change in the near or distant future," he said.
He added that HM Treasury is "clearly alive" to making the UK market attractive.
Evolving regulatory standards have also caused barriers to entry to rise significantly.
Baillie said the UK regulators are now indicating they appreciate this.
She highlighted the £5bn AUM threshold proposed for the application of the new climate-related disclosures by asset managers proposed in an FCA consultation paper on enhancing climate-related disclosures issued last month.
According to the FCA the smallest 2% of managers will not be in-scope of this regulatory initiative.
The FCA declined to comment on the findings of the FOI.
Consolidation drive
While the new entrants are dwindling, consolidation is booming, making the market even more top-heavy.
The year got off to a flying start when it came to consolidation. Part of this is down to a pause brought on by the pandemic, but it shows the significance of the trend in the sector.
In the UK, there were 63 deals in 2021 up to April, surpassing the previous record of 41 deals set in entirety of 2018, according to figures from Refinitiv.
"There has been a clear move towards scale in the asset management industry," said Gavin Haynes, investment consultant at Fairview Investing.
He said this was down to a number of factors including the costs of running an asset management company increasing and the downward pressure on fees squeezing margins.
According to EY, margin pressure is only going to increase over the next number of years.
EY estimates for 2021 to 2025, which assume AUM growth of 15% over five years, predict average operating margins to decrease by 0.8 percentage points. However, EY said most firms will see profitability fall even quicker, particularly for small- and medium-sized.
Under their "pessimistic scenario", which assumes AUM is flat over the next five years, there would be a 7.3 percentage point drop.
The market is already somewhat concentrated with assets managed by the top ten firms making up 58% of the total, according to the IA. While the financials mean firms are looking toward consolidation, the impact on their customers remains unclear at best.
"I am not convinced this is particularly good news for end investors," said Haynes. "It is hard to think of many mergers in the industry that have led to a better outcome for those investing in funds."
Will boutiques continue to blossom?
Commentators also voiced concerns about a sector without new boutiques.
The impact of the consolidating market "is raising the bar in terms of how big a fund has to be before firms will use it," said Hughes.
He added that there was increasing "risk aversion to backing smaller, lesser well-known boutiques which is making asset raising more challenging".
One boutique that managed to penetrate the sector despite both Brexit and the pandemic was Philip Rodrigs' Raynar Portfolio Management (RPM).
Rodrigs launched RPM two years after being dismissed from River & Mercantile. His inspiration was, as a small-cap fund manager, watching the companies he invests in doing well.
In his time analysing the sector he found "a small company getting large, does not necessarily mean that company gets better".
"Sometimes the bureaucracy becomes overwhelming and in that pursuit of scale you lose that focus on the customer," Rodrigs said.
RPM currently has £99.1m in AUM, according to its May factsheets. The £44.1m Raynar Flagship fund, which launched in June last year, returned 41.58% in 2020 and 25.78% in 2021 to the end of May.
That 67.4% overall return compares to a 51.6% return for the IA UK Smaller Companies sector during the same period, according to figures from FE Fundinfo.
While Rodrigs managed to navigate the sector, Darius McDermott, managing director at Chelsea Financial Services, said given the challenges for boutiques some companies are opting for a "boutique of boutiques" model, citing RWC, JO Hambro Capital Management and Polar Capital as examples.
He added the model, where an umbrella company takes on compliance, marketing and sales, "seems to work well".
Rodrigs said he explored several options, settling on the choice that allowed him to "begin from the ground up, without comprmise".
The manager voiced concerns about blockers to entrepreneurial spirit in the sector.
"There is more friction and I am not sure that is advantageous for an industry where fresh ideas and approaches are as important as they used to be," he commented.
Hughes thinks there are reasons to be hopeful about the future of boutiques and said it will be interesting to see if the pattern of consolidation reverses.
"With hopefully light at the end of the pandemic tunnel and much greater clarity over Brexit now it has happened, maybe some of the blockers that has dissuaded new asset managers from launching in the UK have eased," he concluded.
