Competitive failure

Font Size

Print

Feedback

Email

Discuss

: Economists tend to think that an industry divided between hundreds of players, each with a tiny market share, should be fiercely competitive, with prices cut to the bone. But economic theory struggles to explain the bizarre world of fund management, where the market is fragmented but fees stay stubbornly high.

The takeover of Barclays Global Investors (BGI) by BlackRock, finalised on June 16th, will create the world’s largest asset manager. More deals are likely in the coming months. In part that is because banks are keen to shed their fund-management arms, either because they need to raise capital or because they no longer see a business case for combining deposit-taking with portfolio management. In part it is because stockmarket falls in 2008 slashed fund managers’ revenues, leaving some groups with broken business models. But the industry remains massively diffuse and has defied past predictions of consolidation. Even the BGI/BlackRock deal will create a fund manager with only 3-5% of the global market. Perhaps the problem is that the industry has difficulty generating economies of scale. Might a few mergers be good news?

Bigger does not necessarily mean better when it comes to running other people’s money. True, a bigger group has more money to spend on marketing and can achieve economies of scale in areas such as back-office technology and administration. But there are also disadvantages of scale. Large funds are less flexible and tend to move prices against them when they trade; they also tend to be more bureaucratic and end up alienating talented managers, the ones clients want to look after their money. Luck also plays its part. Fund managers may grow for a while because of superior investment performance. But sooner or later they will be undone by a change in market fashion; their performance will deteriorate and hot money will move elsewhere.