USAA retreats from asset management business with $850 million sale to Victory Capital

USAA will continue to operate as an insurance brokerage and banking business

Nov 8, 2018 @ 5:07 pm

By Jeff Benjamin

After several years of celebrated efforts to expand the distribution of its investment products beyond its loyal membership base of veterans and active-duty military members, USAA has found a solution in selling the $69.2 billion asset management operation.

The deal, announced earlier this week, will move USAA's mutual funds, ETFs and 529 college savings plan business under the umbrella of Victory Capital Holdings, which is paying $850 million for the business. USAA will continue to operate as an insurance brokerage and banking business serving military families.

This marks the second acquisition since September for Victory Capital, which raised $152 million through a February initial public stock offering.

Citing challenges in areas such as cost pressure, technology and innovation, a USAA spokesman said selling the asset management business was the best thing USAA could do for its 13 million members, 1.5 million of whom currently invest in the products being sold to Victory Capital.

"The benefits of this move to our members far outweigh what we could have done in-house," said USAA spokesman Matt Hartwig.

"If you look at the trends in the industry and look into the future, we didn't think we would be able to offer the kinds of opportunities in this space that are available through Victory," he added.

The fact that the USAA brand will stay with the asset management business says a lot about the deal's potential for sales leverage.

"We'll have access to their member base," said Mannik Dhillon, president of VictoryShares and Solutions.

"We view this as an ongoing relationship in that we are both catering to the same member base with the desire that those members have a good experience regardless of the branded product," he said.

The USAA funds will represent the 11th fund franchise under Victory Capital, but the size of the latest addition will nearly double Victory's total assets under management to more than $144 billion.

The USAA funds are split almost evenly between equity and fixed income, with most of the equity funds subadvised by outside managers.

"The acquisition will provide much needed scale for Victory to compete against larger asset managers," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

"We expect some consolidation of overlapping strategies to occur and Victory to look to bring down expense ratios amid an industry shift to lower-cost mutual funds and ETFs," he added. "USAA has a strong suite of mutual funds, and more recently entered the ETF market with smart beta strategies.

The fixed-income expertise is seen as the biggest boost to Victory Capital, according to Morningstar analyst Alonzo Bruno.

"It comes down to Victory Capital being very slim on the fixed-income side," he said. "And I think it's been tough for USAA to gain traction outside of the military audience."

While Mr. Bruno said it's too early to know if there will be any changes to the USAA lineup post-acquisition, he believes the USAA brand will live on, regardless.

"I would imagine USAA will continue pushing clients toward USAA funds," he said. "And I would imagine there would have to be some kind of monetary incentive for the USAA parent company to allow Victory to keep that name."

Mr. Dhillon, who acknowledged that access to USAA's 13 million members was part of the appeal of the deal, said "We are still working out how Victory will be marketed to USAA members."

In addition to seeking deeper penetration of the 11.7 million USAA members that don't already invest in USAA funds, Mr. Dhillon said Victory will be marketing other Victory fund franchises to USAA members and expanding the distribution of the USAA funds beyond the membership.

"The USAA funds have a lot more members they can serve," he said. "It's our hope to bring that awareness to USAA funds."

The sentiment was echoed by USAA's Mr. Hartwig.

"We see this as a great opportunity for our members because of Victory's sole focus on investing," he said. "When the transfer is complete, our members will see twice the number of available mutual funds and three times as many ETFs."

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