Invesco’s acquisition of ETF provider Source has once again raised questions over active management and whether passive investing is now the biggest growth area for firms.
Invesco beat off competition from another undisclosed bidder at the end of last month to acquire Source for an undisclosed sum, which has been rumoured to be $500 million (£385 million), although Invesco said the actual figure is ‘substantially less’.
Source will sit alongside Invesco’s existing ETF business, PowerShares, which at the end of 2016 had $110 billion in assets under management (AUM).
No cost-cutting exercise
Speaking in a conference call following the acquisition, Invesco’s bosses said the deal was not a ‘cost-cutting exercise’ and is more about helping the firm grow its ETF presence.
Invesco is not the only company looking to grow its business by expanding its ETF arm. Earlier this year, PowerShares lost its head of EMEA, Bryon Lake, to JP Morgan Asset Management.
He was hired by the asset manager to lead its expansion into the ETF market. At the time, JPM’s global head of beta strategies Michael Camacho, said: ‘Our intention is to build a global beta strategies business with strategic, alternative and ETF capabilities to serve the needs of clients globally.’
According to Lake, it is ‘fair’ to say passive investing is the biggest growth area for asset managers, but he added: ‘I don’t think it’s binary, black or white.
‘A lot of this is the shift in clients. More and more are shifting to a discretionary approach. They prefer an ETF wrapper, but with things like smart beta.’
Lake added that along with the US, Europe has the highest growth potential for ETFs. He said the inflows into European ETFs ‘show the direction’ the industry is moving towards.
Assets under management in ETFs listed in Europe reached a record high of €584 million in the first quarter of the year, and are projected to reach €1 trillion (£850 billion) by 2020, according to data from Morningstar.
‘Interestingly, if you take both the US and Europe and track the AUM, they track very closely. Europe is growing in a very similar way [to the US]. There’s a pretty significant opportunity to see the upside there,’ he added.
Invesco/Source deal driving growth
The transaction, expected to complete in the third quarter of this year, includes around $18 billion in Source assets and another $7 billion in externally managed AUM.
Andrew R. Schlossberg, senior managing director and head of EMEA for Invesco, said: ‘Both sides recognise this is a great opportunity for Source to get to the next level and to help Invesco grow in the ETF space. We don’t see this as a cost-cutting exercise.’
Detlef Glow, head of EMEA research at Thomson Reuters Lipper, said the move ‘makes sense’ from an AUM viewpoint, and said that the presence of Invesco PowerShares in the US and Source in Europe will help PowerShares grow in Europe, where it has lacked a strong presence.
Also speaking in the conference call, Mike Paul, executive chairman of Source, said: ‘Invesco and Source are extremely complementary, and the combined business will be a true leader in the ETF market across Europe.’
Martin L. Flanagan, president and CEO of Invesco, said the firm acquired Source to ‘help us meet increasing demands from clients who want to work with investment organisations that can deliver across the full range of investment capabilities and provide the outcomes they seek.’
Glow said the product range of the combined business will make it more attractive to large investors looking for a ‘one-stop shop.’
He added: ‘It will allow them to buy all the products they may need to implement their asset allocation views from a single promoter, easing research efforts at the promoter level and improving the trading of the ETFs.’
More acquisitions on the horizon
Despite Invesco denying the Source acquisition cost it $500 million, questions have still been raised over Source’s worth, given the firm has not been profitable since it was launched in 2009.
But Glow said the ETF industry is one where ‘size matters’ and added that acquisitions are a way for companies to gather ‘critical size in the market’.
He said: ‘In this regard, I am expecting more takeovers over the next few years as promoters of actively managed funds and ETFs look for market entry into Europe.’
In addition to its $18 billion AUM, Source also manages another $7 billion for other firms including Pimco, Man Group and Legal & General – something which Invesco sees as part of its opportunity to grow its ETF presence in Europe.
Flanagan said Invesco will ‘try to continue’ with Source’s partners, and said he ‘doesn’t see that model changing’ in future.
He said: ‘We’ll be spending time getting to know all partners Source works with and growing that over time.’
But Flanagan refused to say whether Source chief executive Julian Ide (pictured), who joined the firm from Old Mutual Global Investors, would keep his job following the acquisition, and said ‘no decisions have been made around personnel yet.'