Consolidation in the asset management industry is not new, and there have been successes and failures during the past few years. But the industry is becoming increasingly top-heavy, with the two biggest players— Vanguard and BlackRock—taking commanding market shares over peers.

Their dominance is largely based on their passive-funds businesses, while the rest of the industry is fragmented, which makes it ripe for further consolidation, according to a recent report by Morningstar, called Growing Pains: Asset Managers Tackling Industry Consolidation.

“While the asset management industry continues to grow, competition has also intensified, setting the backdrop for increased M&A activities,” said Germaine Share, Director of Manager Research.

“However, we found from our case studies that bigger is not always better. Ultimately, a good asset manager is one that consistently delivers for investors and can innovate sensibly to stay competitive,” Share (pictured) added.

The benefits of a merger with or takeover by a larger asset management includespreading their costs over their bigger asset bases and providing room to lower expense ratios for investors, giving them an advantage against the persistent fee pressure in the industry, especially from passive funds.

Asset managers might also gain access to existing investment capabilities or distribution channels through M&A, both of which can bring a new client base. This is particularly advantageous when it comes to specialised areas, where it may be more time-consuming and difficult to build a new in-house capability.

Franklin Templeton and BlackRock have both been on buying sprees to grow their alternatives businesses, noted Morningstar.

However, while the objectives and potential benefits for asset managers to engage in M&A seem clear, “achieving them is often easier said than done,” said Morningstar. There could be various integration challenges, especially concerning investment culture and talent retention, given the people-centric nature of asset management.

In any case, investors can expect more product diversification. Asset managers throughout the world, including in Asia, have also begun to tap into this trend, with some global asset managers bringing existing active ETF products to the region. At the same time, semi-liquid, open-ended funds that invest in private assets are also becoming more available, notably via private banking channels, Morningstar concluded.