The European fund industry has seen a lot of consolidation in recent years, due partly to the regulatory pressures and partly to the difficulties faces by small firms when trying to survive the financial crisis, but this trend now appears to be making its way into the European ETF market.
Last week saw the announcement of the takeover of ETF provider Source by US fund giant Invesco, with the aim to consolidate the Source business with its existing ETF offering, Invesco PowerShares.
The transaction includes the acquisition of around $18bn of Source-managed assets under management (AUM), as well as an additional $7bn in external assets, and adds to Invesco’s $110bn in PowerShares assets.
While for Invesco the move offers improved exposure to the European market, as well as the ability to exploit Source’s innovative product range, for Source the main advantage is Invesco’s economies of scale. Currently, Source is the seventh largest ETF provider in Europe, with a 3.8% market share, while Invesco’s ETF business only has 0.4% of the European market (according to Morningstar).
Detlef Glow, head of EMEA research for Thomson Reuters Lipper, explains: “The combination of the two companies makes sense not only from an assets under management point of view. While Invesco Powershares has a good footprint in the US, Source is a well-known ETF promoter in Europe. The combined sales force may accelerate the growth of Invesco Powershares in Europe, since the salespeople may have different client books.
“After the merger Invesco Powershares will also move from being a promoter that offers ETFs that are mainly based on strategy indices to an ETF promoter that offers a full product range of ‘plain-vanilla’ sector and strategy ETFs. This means the ETFs may become more attractive to large investors looking for a one-stop shop; 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.”
There has previously been some merger and acquisition activity in the ETF space in recent years, with BlackRock’s iShares acquiring Credit Suisse’s ETF arm in 2013, while WisdomTree bought a majority stake in London-based Boost in 2014, but over the last couple of years most of the M&A activity took place among mutual fund providers.
With Invesco and Source paving the way, this could be about to change, though Glow believes the merger is a sign of the maturity of the European ETF market, rather than the “begging of a trend toward a consolidation of the European ETF industry” as a whole.
He said: “The ETF industry is an industry where size matters, so a takeover is one of the ways to gather critical size in the market. 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. The names of the ETF promoters may change, but I strongly believe the number of ETF promoters in Europe will increase further.”