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Morningstar | Invesco's Purchase of OppenheimerFunds Should Help Offset Some Industry Headwinds

A confluence of several issues--poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel--has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management. While we believe there will always be room for active management, we feel that the advantage when it comes to getting placement on platforms will likely go to those asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees.With $888.2 billion in managed assets at the end of 2018, Invesco already had the size and scale necessary to be competitive in the industry, but its purchase of OppenheimerFunds (which brings an additional $250 billion in assets under management to bear) should lift it to a different level. The combination will make Invesco the 13th-largest global asset manager, and the sixth-largest manager in the U.S. retail channel (with more than $650 billion in AUM). That said, size is not always a guarantor of organic growth (which is a function of performance and fees) and above-average profitability, as demonstrated by Invesco's historical shortcomings on the profitability front.During 2013-17, the firm's organic growth rate averaged 1.8% (1.7%) with a standard deviation of 1.6% (3.1%), making it one of the better AUM growers (with one of the lowest standard deviations) among the 12 asset managers we cover. But GAAP operating margins of 25.0% during the same time frame were below the group average of 29.9%. While we expect the Oppenheimer deal to keep the firm's margins from deteriorating too much in the face of industrywide fee compression and the rising costs associated with improving investment performance and enhancing product distribution, it will lead to a weaker near-term organic growth profile than we'd been projecting for a stand-alone Invesco (which already had a really poor showing in 2018). With the market tending to reward organic growth and above-average profitability in the asset managers, Invesco has a steep hill to climb.