Amvescap CEO Marty Flanagan, at the helm of the British-based, Atlanta-operated investment manager a mere six months, made his first big splash earlier this week: the $730 million acquisition of exchange-traded fund firm PowerShares Capital Management.
The upside for Amvescap is pretty clear: The deal instantly gives the international mutual fund giant – which has no ETFs of its own – a piece of the rapidly growing ETF market. According to the Investment Company Institute, ETF assets grew by almost 30% in 2005 through November. In one fell swoop, Amvescap acquires a suite of 36 ETFs covering broad-market indices, sectors and sub-sectors, as well as socially-responsible offerings and regional funds. Indeed, PowerShares has the second-largest number of ETFs on the market, behind Barclays Global Investors, with the product line growing exponentially: Thirty-two of the 36 PowerShares were born in 2005, and PowerShares CEO Bruce Bond says several more are in registration.
"The combination of PowerShare's ETFs and AIM's broad range of actively-managed mutual funds really creates a very robust and comprehensive lineup," Flanagan said in a conference call with reporters. "This puts us in a very important and leading position in [the ETF] marketplace, like no one has offered the adviser channel."
Wheaton, Ill.-based PowerShares will be affiliated with Amvescap's U.S. unit, AIM Investments, and Bond, who will continue to lead PowerShares, will report to AIM President Mark Williamson.
"Amvescap clearly understands that ETFs will take dramatic market share from traditional mutual funds over the next decade," says David Jackson, the editor of the ETF Investor blog and Seeking Alpha blog network. "The ETF business is tough to break into as Barclays and State Street blanket the market with index ETFs covering an widening array of asset classes."
Paul Mazzilli, an ETF expert with Morgan Stanley, says, "It's a quick way to get into the ETF market with a name that is somewhat well-known." Mazzilli estimates that starting an ETF business from scratch would take at least a year.
Plus, there aren't currently any other PowerShares out there, and AIM competitors will have a thorny time trying to follow their lead. PowerShares is the fourth-largest ETF provider, followed by mutual fund firm The Vanguard Group, and there are no other independent ETF firms of any size available for acquisition.For some, the move presages the direction of the mutual fund industry. "This is the first mainline mutual fund company that has reached out and said we believe ETFs are a big part of the future," Bond says, adding, that the mutual fund business "is not that transactional any more, a lot of it is consultative."
For PowerShares, there's a lot to gain, aside from the $730 million. "We have a large distribution force to go out and tell this story in channels that now... are really ready for a product like this," says Gene Needles, who heads AIM Distributors.
Mazzilli is skeptical about the potential impact of that sales force, but concedes, "the upside is, if they just mumble ETFs and PowerShares, it's helpful."
There's also an enormous back-office capacity that PowerShares can now tap into, which will enable them to better compete with BGI and SSgA, Mazilla says.
Bond is reticent to talk target asset figures, but he would say that "for the foreseeable future, and definitely for the first five years," he expects rapid asset growth for a firm that's already seen its AUM soar from $400 million at the beginning of 2005 to $3.8 billion today.