Asset manager L&G is planning to set up hybrid “crossover” funds alongside its extensive passive business. These funds will contain both public and private investments. With this in mind, the British asset manager is working with specialists such as Blackstone.
L&G Asset Management currently still relies on its British home market for more than half of its business. “Within three to five years, however, that share will fall below 50 percent and international activities will be larger,” said CEO Eric Adler in an interview with Investment Officer.
Both markets will grow, Adler predicts. That growth is also necessary, because although L&G, with total assets under management of 1,300 billion euro, is the largest British asset manager, that is no guarantee of survival in the global consolidation race.
“Our strategy is to increase scale,” Adler said. “That is also what the other large houses are doing. At the other end of the spectrum, you see boutiques that survive on the basis of their specialisms. But we need scale in order to strengthen and expand our position.”
Players that lose the race for scale will struggle, the American believed. “You do not want to end up in the middle, where you do not have the distinctive qualities that allow a boutique to stand out and are more expensive than the largest competitors. In the middle, you are vulnerable.”
According to L&G, the market will eventually offer room for “a few European champions” in asset management. “We could be one of them.”
L&G wants to realize the necessary growth primarily by creating a broader product offering. Historically, it has largely been a passive investor, with more than 500 billion euro currently in index and ETF products, but that offering has been expanded for some time now with more active investment strategies.
High cost/income ratio
One of the motives for this is also the asset manager’s cost/income ratio. According to analysts, it is high, at well over 75 percent. Adler sees lowering that ratio as one of his challenges. His solution, however, is not necessarily to reduce costs (read: cutbacks and reorganizations), but to increase revenues. “At the moment we are very satisfied with the capabilities we have in-house, and we are not going to cut into those. What we can do is improve ourselves further in how we deploy those capabilities.”
This includes, among other things, new applications for what L&G’s “ETF factory” produces. That factory became large by building strictly passive products, but will now also start supplying building blocks for crossover funds, or hybrid funds. These contain both public and private investments. “We want to make the potentially higher returns of investments in private markets more widely available to the wealth segment,” Adler said. “But the illiquidity of those investments can be a drawback. In hybrid funds, that drawback is mitigated by also including a large share of listed investments.”
Morningstar refers to this trend as public/private convergence: public and private markets are increasingly intertwining. Adler said: “For institutional investors, there is nothing new under the sun: many have been allocating parts of their assets to private equity or credit for decades. But for individual investors, integrating private investments into their portfolios is a difficult issue.”
Credit platforms combined
L&G’s solution to that issue is teamwork, Adler added. The British asset manager, a subsidiary of insurer L&G, has been making targeted acquisitions for two years to bring in complementary expertise and entered into a partnership last summer with the American alternatives giant Blackstone. The credit platforms of both asset managers are being combined.
“We can do a great deal ourselves, but there are areas where you need to look for a partner. Especially if you want to create a best in class product. I dare say that together with Blackstone we will be able to do that. It will, incidentally, be a hybrid public-private credit strategy.”
That is where L&G’s capabilities will also make a contribution. The crux then is to charge a higher fee for these types of products, which results in a lower cost/income ratio.
This does not mean, however, that L&G will abandon its “standard ETFs.” “On the contrary. We are big in that area, but I want us to become even bigger. You will see more and more ETF offerings from us. In Europe in particular, we are doubling our efforts in this area.”