Up to 15 billion pounds a year, by some estimates, could find its way to the mutual fund industry after the government relaxed rules forcing pensioners to buy an annuity at retirement in Wednesday's budget.

At the same time, Chancellor George Osborne raised the limit on how much people could save tax-free in Individual Savings Accounts to 15,000 pounds a year and loosened the rules around what people could invest in.

"The outlook for asset managers in terms of new asset flows is pretty positive," said Ed Dymott, head of business development for Fidelity Worldwide Investment, particularly given 70 percent of UK personal wealth is held by a generation that is set to retire over the next 10 years.

The budget news boosted shares in fund managers on the day and could make some of them, specifically those with a UK focus such as Jupiter Asset Management (>> Jupiter Fund Management PLC) and Henderson Group (>> Henderson Group Plc), more attractive takeover targets.

Stuart Duncan, financials analyst at Peel Hunt, said the budget may "stimulate potential buyers to think again", but the hurdles to getting a deal done can be high, especially for fund managers who are already competing in the same market.

That's because so much of a firm's value is tied up in its managers, who, if they are not happy with a deal, could leave, taking a large chunk of the assets they manage with them.

"This is an industry where consolidation is obvious and logical, but the people and personality issues remain quite challenging," Duncan said.

"Star" fund manager Richard Buxton, for example, left Schroders (>> Schroders plc) for the fund arm of insurer Old Mutual (>> Old Mutual plc) last year and within months millions of pounds had followed him.

One group of potential buyers who can avoid that issue is the foreign firms who may want to buy an existing operation and are willing to leave it largely as is - in the manner of Bank of Montreal's (>> Bank of Montreal) ongoing bid for F&C Asset Management (>> F&C Asset Management plc).

They could include Macquarie (>> Macquarie Group Ltd), Natixis (>> NATIXIS), Mitsuibishi Corp (>> Mitsubishi Corp), Royal Bank of Canada (>> Royal Bank of Canada) and Ameriprise Financial (>> Ameriprise Financial, Inc.), all of which have been rumoured to be interested in the past, said David McCann, analyst at Numis.

Those who come will be able to tap a thriving market.

Total assets managed by UK fund managers of whatever stripe for UK clients are around 3 trillion pounds, the Investment Management Association said. While UK government statistics put UK household currency and deposits at 1.3 trillion.

RECOVERING MARKETS

As markets have recovered strongly since mid-2012 so have the fortunes of asset managers, valued in part for the size and performance of their assets under management.

Over the period, the Thomson Reuters UK Investment Management & Fund Operators Index <.TRXFLDGBPINVM> has risen 73 percent, against a 26 percent for the FTSE All Share <.FTAS>.

While the F&C deal had been criticised as undervaluing the company by a leading shareholder - and as activist hedge fund Elliot Advisors builds a stake in the hope of a bidding war - valuations elsewhere are less attractive, analysts said.

"At a headline level, F&C was by far the cheapest. It's peers, of a similar size or bigger, are far less compelling," said Numis' McCann.

While F&C trades on a price of 15 times earnings, just above the sector median of 14, it has a weak operating margin - the amount of money the company can keep after paying out costs, such as staff - of 13.3 percent, Thomson Reuters data showed.

By comparison, Schroders (>> Schroders plc) and Aberdeen Asset Management (>> Aberdeen Asset Management plc) are on 21.7 percent and 36.5 percent, respectively, with Jupiter on 28.2 percent, Henderson on 19.3 percent and Ashmore Group (>> Ashmore Group plc) on 57.8 percent.

That fed through to a return on equity for F&C of just 2.49 percent, against a sector median of 15.5 percent, Reuters data showed.

While suitors may look to buy a smaller sub-500 million pound rival such as Polar Capital (>> Polar Capital Holdings plc) or Liontrust Asset Management (>> Liontrust Asset Management PLC), neither are particularly cheap but the sums involved are that much smaller.

They could even buy an unlisted fund arm, most of which are held by insurers such as Legal & General (>> Legal & General Group Plc), Aviva (>> Aviva plc) and Standard Life (>> Standard Life Plc) - if they can entice them to sell given the pressure Osborne has placed on their annuities business.

(Additional reporting by Chris Vellacott, editing by David Evans)

By Simon Jessop