The London Stock Exchange Group plc said it has agreed to buy the Frank Russell fund management and index group for $2.66 billion from Milwaukee-based Northwestern Mutual, creating a global giant in the fast-growing market for benchmark financial indexes.
The move aims to exploit the global trend towards Exchange Traded Funds and other ‘passive’ investment strategies, whose popularity has exploded with investors looking to save on management fees in recent years. ETFs and other passively managed funds traditionally track an index such as Russell’s.
Passively invested assets quadrupled to $8 trillion between 2003 and 2012, and ETFs have grown at an average rate of 30% in the last decade to total $2 trillion.
Together, Russell and the LSE’s FTSE family of indexes have $9.2 trillion of assets benchmarked against them. Russell is largely present in North America, while the FTSE indexes cover Europe and emerging markets, notably China.
Analysts expect both the fund management industry in general, and passive investment strategies in particular, to grow rapidly in future, owing to the continued rise in private wealth in emerging markets.
Regulators have already started to register concerns about the implications, and are looking into whether the size of some fund managers constitutes a risk to the financial system in general.
Andrew Haldane, executive director for financial stability at the Bank of England, warned in a speech in April that the trend increases the risk of herd behavior in financial markets, causing increased volatility. And the Federal Reserve has reportedly looked at the idea of making some mutual bond fund charge for withdrawals to stop investors all dumping their holdings at once when the Fed starts to raise rates.
But LSE chief executive Xavier Rolet told a conference call the prospect of regulators taking a tougher line on passive investment strategies hadn’t influenced their view of Russell’s business.
LSE Group said it would fund the acquisition with a $1.6 billion issue of new shares and $1.1 billion in new debt. Management told a conference call they thought this would allow the group to keep its current credit rating.
Despite the announcement of the new share issue, LSE’s shares rose sharply on the announcement, illustrating how important it is for traditional stock exchanges to diversify away from their old businesses which have come under pressure from the spread of so-called “dark pools” and other informal marketplaces.
LSE said it would undertake a strategic review of Russell’s own asset management business, with over $250 billion in assets under management, but officials wouldn’t be drawn on what they intend to do with it.