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Looking at a Possible Merger Between Invesco and Oppenheimer

The firms have similar strengths and weaknesses.

On October 18, 2018 Invesco announced that it would purchase OppenheimerFunds for $5.7 billion. Below is analyst Bridget Hughes' initial take on the combination after rumors of it emerged in September. 

If Invesco buys OppenheimerFunds, or any other firm, investors can expect some change.

Ignites.com and other news outlets reported Friday that sources say Invesco was finalizing a deal to purchase OppenheimerFunds, which its longtime parent, insurer MassMutual, had been shopping since at least August 2018. The deal would be a big one, combining two of the U.S. mutual fund industry's top 20 firms in terms of assets under management, but it wouldn't be the first time in recent years that two major players joined forces. Faced with outflows from their actively managed funds and fee pressures, for example, Janus and Henderson merged in May 2017, then Standard Life bought Aberdeen in August 2017.

Although neither Invesco nor OppenheimerFunds has commented on the rumors, the suggestion is plausible. Both firms are suffering the same kinds of industry headwinds that most active managers face, and Invesco has a long track record of acquiring other investment firms, several of them considerable in size. Under Marty Flanagan's 13-year tenure as CEO, particularly notable purchases include PowerShares' exchange-traded fund lineup in 2006 and Morgan Stanley's Van Kampen suite of funds in June 2010. More recently, the firm added two other ETF outfits: Guggenheim's group and Source of the United Kingdom.

So far on the ETF side, Invesco hasn't made much change to its acquired funds, though it has become more disciplined about what PowerShares brings to market. It has also realized some efficiencies in the back office after integrating the Guggenheim lineup, but shareholders haven't likely noticed too much (except the name changes on the ETFs it now offers; all are Invesco-branded).

Invesco and Oppenheimer have a similar focus on strategic-beta, or "smart beta," ETFs, which may create some redundancies in the combined ETF lineup. For example, Oppenheimer offers a suite of revenue-weighted funds that are very similar to Invesco's fundamentally weighted products. While they are philosophically aligned, they also compete with one another. In any case, Oppenheimer's ETF business is a tiny part of its overall asset mix.

Interestingly, our open-end Morningstar Analyst Ratings suggest the firms are strong in similar areas and weak in similar areas. The only stark difference is in taxable bonds, where we give three Bronze ratings and two Neutral ratings to Invesco's taxable-bond funds and five Neutral ratings to Oppenheimer's.

The firms look strongest in foreign equities, where 75% of Invesco's rated funds are Morningstar Medalists and 66% of Oppenheimer's are medalists. In U.S. equities, Invesco scores 45% medalists to Oppenheimer's 43% medalists. In allocation, both fare poorly. We rate three of Invesco's allocation funds Neutral and one Bronze compared with two Neutral ratings for Oppenheimer.

Neither firm looks strong in municipal bonds. Invesco gets one Neutral rating, and we don't rate any Oppenheimer funds. However, when we did last cover Oppenheimer's muni funds four years ago, we gave them two Negative and three Neutral ratings.

Based on Invesco's history, some change is likely if a merger ensues. When Invesco acquired the Van Kampen funds, it quickly merged some redundant offerings and put expense ratio caps and waivers in place after indicating cost savings would eventually come through economies of scale, and more gradually, eliminated the Van Kampen fund boards of directors. Moving to one board did save investors money, but meaningful expense ratio reductions didn't materialize after the caps and waivers expired and weren't renewed. After the fund mergers (as well as some rationalization of Invesco's own lineup), Invesco's open-end suite of offerings was, for the most part, distinctive. Immediately following the merger, Invesco retained most of the investment talent (though some have left and/or retired in the eight-plus years since then).

A combination of Invesco and OppenheimerFunds presents some redundancies. Both firms have considerable assets in high-yield munis, for example, and the merger would significantly increase Invesco's already heavy exposure to U.S. large-cap equities, which are represented in the Morningstar Categories that have experienced the heaviest outflows as investors have moved to cheaper, more-passive options.

An OppenheimerFunds purchase, though, would give a big boost to Invesco's taxable fixed-income assets; however, while Invesco has some pockets of strength, neither outfit boasts standout teams overall.

What's perhaps most interesting about this potential combination is what happens to the international funds, where the two firms are strongest. OppenheimerFunds has more assets there. Its AUM in diversified emerging markets outnumbers Invesco's $39 billion to $3 billion. Oppenheimer has $25 billion in foreign large-growth compared with Invesco's $7 billion, $11 billion in small-cap foreign funds compared with less than $1 billion, $12 billion in world large-cap stock to $2 billion, and $10 billion in world small-cap stock to $1 billion.

Whether or not an Invesco-OppenheimerFunds combination is truly complementary or merely an AUM grab is arguable. In the past, Invesco was fairly quick to make changes after a merger, and that would likely be the case here. Expense ratio reductions could be more meaningful than they ultimately were with the Van Kampen purchase, and certainly fee competition suggests that they should make the most of potential efficiencies.