Morningstar Magazine - June/July 2017 - 47

equity side of the business, which is the most
exposed to the growth of passive investing,
and where the fee and performance discrepancy
is the greatest.

to acquire Scout, an institutional investment
manager with $27 billion in AUM. The combined
firms will have $60 billion in client AUM and
advisement once the deal closes.

During the past year, we've already seen
some of this play out, as several different asset
managers have announced plans to merge.
Aberdeen, for example, announced that it would
be merging its operations with Standard Life,
with the two British firms overseeing a combined
$800 billion in assets once the deal is completed.
While the increased scale will do little to
improve Aberdeen's investment performance
issues, it will go a long way toward helping
offset the fee and margin compression
that we expect to see in the industry in the near
to medium term.

Even the smallest of firms may catch the eye of
acquirers, though likely not for scale. Rather,
these deals may be completed to fill product holes
or as product enhancement moves, as larger firms
look to buy performance records. Smaller firms
with lackluster performance may be under
even more acute pressure to find buyers, and may
need to accept discounted offers. Overall, we
expect consolidation to accelerate in the coming
years as firms look to increase scale and enhance
distribution, which should help offset some
of the pricing pressure and higher costs we expect
to see in the industry longer term.

The same could be said for the announced
combination between Janus Capital Group and the
Henderson Group, a large investment manager
based in London. When the deal was announced
in October, we noted that while there were several
reasons to like the deal strategically (with
increased scale being the top one as the combined
firms would be managing more than
$320 billion in assets), the merger itself would do
little to abate the challenges that the two firms
are facing in their core markets. Janus continues
to deal with the headwinds posed by the
adoption of the fiduciary rule, and Henderson
is mired in the uncertainty created by Brexit (which,
no doubt, also played a role in the AberdeenStandard Life combination).
Unlike past rounds of consolidation, which
involved managers buying other managers to
either fill in product sets or expand distribution
reach, we expect future deals to be done
more for scale than anything else. Many of the
midtier asset managers (those with $250
billion-$750 billion in assets under management)
are likely to acquire small to midsize firms
(those with $10 billion-$250 billion in AUM),
though they may well lose upward of 40% of the
assets they are acquiring as they consolidate
their fund operations. Combinations of small to
midsize firms looking to increase scale are
also likely. Consider Raymond James' Carillon
Tower Advisers subsidiary's move in April

Promising Partners for the Next Decade

Looking across the traits we believe will drive
success in the coming years, more than a handful
of firms stand out as promising partners for
investors and the advisors that serve them during
the next decade. That said, this is not an
all-inclusive list, merely a reflection of some
of the industry's standouts.
Vanguard
Among the best positioned of the industry
leaders, Vanguard's business model is
differentiating and formidable. The firm's mutual
ownership allows it to offer investments at cost,
and that, along with a robust lineup of
straightforward active and passive investments,
has made it the largest retail money manager.
With $3.4 trillion of assets under management,
though, the law of large numbers will eventually catch up with Vanguard. Indexing
could also suffer during a major market correction,
with the combination of market losses and
outflows reducing the company's assets under
management. Even so, we have issued forwardlooking, qualitative Morningstar Analyst Ratings to
84 Vanguard funds and ETFs, 79 of which are
rated Gold, Silver, or Bronze, indicating that we
think these funds will outperform their benchmark
and a typical peer over a full market cycle.
BlackRock/iShares
BlackRock BLK is known for its scale through its

passive iShares ETF platform, as well as
its investment scale among institutional accounts
(much of which is not covered in this paper).
Beyond passive investing, BlackRock has a strong,
well-earned reputation for active fixed-income
investing, with many of its active bond
funds earning Medalist Morningstar Analyst
Ratings. We also believe that an expansion of
BlackRock's Aladdin enterprise investment
system should contribute to the firm's staying
power and industry influence in the years
to come. BlackRock's vulnerabilities include its
active equity-fund lineup, which is undergoing
a makeover, as well as the potential for a
prolonged underperformance of index-based
products. With BlackRock being one of the
best positioned among the publicly traded asset
managers we cover from both a product and
distribution perspective, and producing better and
less volatile AUM, revenue, and profitability
growth than its peers, our stock analysts
have awarded the firm a Morningstar Economic
Moat Rating of wide.
T. Rowe Price
T. Rowe Price stands out among the large
firms for its consistent and repeatable investment
process. This firm is a leader at succession
planning, doing more than most competitors to
eliminate generational-transfer risk, which
occurs when one manager retires and hands the
reins to another. The company has also been
mindful on the cost side, with more than
60% of share classes below average fee levels for
their categories at the end of last year. While many
active competitors are now realizing that their
higher fees have been a disservice, T. Rowe Price
has been cost-conscious all along and will be
under less pressure to cut fees, making their profit
margins and earnings more stable and predictable
going forward. Like BlackRock, T. Rowe Price
has been awarded a wide moat rating by our
stock analysts. Importantly, our manager research
analysts are bullish on T. Rowe Price's funds
going forward, with 31 of them rated Gold, Silver,
or Bronze.
American Funds
Another strong partner for the next decade is
American Funds. This firm's funds have
suffered redemptions over the previous decade,

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