Pressure on fees, net outflows and the rise of ETFs, along with superannuation funds internalizing investment management, is driving the number of Australian asset managers down.

A number of funds have confirmed they are closing shop in recent months, including small-cap manager NovaPort Capital in May, ethical fund manager Ethical Partners in July and last week specialist income manager Wheelhouse Investment Partners.

Others have been forced to merge, especially those on a smaller scale.

Platinum Asset Management recently confirmed that it has received an unsolicited, non-binding offer from Regal to acquire all of the shares it does not already own by way of a scheme of arrangement.

Additionally, reports suggest that rivals such as Challenger and Wilson Asset Management may also be eyeing the fund manager.

Other M&A activity this year included Regal's bid for Merricks Capital and Australian Ethical's acquisition of Altius Asset Management.

Reflecting on these changes, Sean Lehr, equity analyst at Morningstar, noted that while interest rate cuts could provide short-term cyclical headwinds for the sector – potentially extending into fiscal 2025. – asset managers, especially those that emerged in a low interest rate environment, will face significant long-term challenges.

He told InvestorDaily that the low interest rate environment has caused funds to spring up "like mushrooms".

"There are so many of them because of the supportive interest rates and bull markets in general, but since interest rates have gone up -- and I don't think they're going to go back to historically low levels -- I think that's going to be a challenge for a lot of asset managers," he said. he.

"Many of them tend to execute similar strategies, manage using similar investment styles, many of them also cater to niche clients."

He warned that underperforming funds could close, while the sector is likely to continue to see mergers and acquisitions among both small and large firms.

Despite his prediction, Lehr emphasized that the outlook for the landscape is not entirely bleak. In fact, he believes the challenges will force asset managers to adapt and innovate.

This will mean aligning their remuneration structures with more "shareholder friendly" structures, "trimming the fat" to streamline their cost base and diversifying their offerings, distribution channels and products.

“I think there's always room for active management. Demand will always be there, they have their role to play. But they really need to reinvent themselves,” Lehr said.

“As an asset manager, you can still do business, but you have to be brilliant.

“The established organizations, the old-school fund managers, tend to have this old-school mentality about how exceptional their products are or how attached their clients are. I think that needs to change and managers really need to adapt."

A warning to M&A seekers

Lehr also issued a warning to fund managers looking for merger partners, stressing in a recent note that "not all fund manager consolidations have gone smoothly."

In particular, he pointed to Perpetual's acquisition of Pendal in 2023, explaining that the two firms were too similar in style.

"When fund management companies try to merge, they have to find something really different from them, and by that I mean asset classes, distribution team and investment styles," Lehr said.

“When you acquire someone else, you have to make sure there's revenue synergy — because you can launch new products, they're quite different from yours, there's no overlap between them, and you can get cost efficiencies out of them. They are very successful.

“If you look at the example of Perpetual, they are very diversified and then they acquired Pendal, which is quite similar to them in terms of products. I don't think it would increase the value.'