Money managers owned by global investment banks are re-engineering their business models in response to mounting pressure to earn their keep.
“The successful bank-owned asset manager must prove its worth by winning assets to manage in open competition,” said Kevin Pakenham, managing director in the investment-banking division of Jefferies & Co. Inc. “Thus, bank-owned asset managers will seek to prove their independence and their viability.”
At the same time, governments — particularly in the United States — have signaled their intention to separate further the various businesses that are now combined within investment banks.
Although no details have been proposed, some analysts think that higher legal barriers could restrict the ability for bank-owned managers to cross-sell to investment-banking clients.
President Barack Obama has proposed changes that could force some banks to sell their private-equity and
hedge fund operations.
Deutsche Asset Management Inc., Morgan Stanley Asset Management and Amundi Asset Management — the firm formed Dec. 31 as a result of a merger between Crédit Agricole Asset Management and Société Générale Asset Management — are the latest examples of bank-owned managers in the midst of reshaping their businesses.
Goldman Sachs Asset Management, though not restructuring, is ramping up recruitment and has ambitions to double its business in the next five years, according to co-chief executive Marc Spilker.
Deutsche Asset Management chief executive Kevin Parker is implementing strategic changes aimed at turning the company around.
Assets under management remained flat at $674 billion for the nine-month period ended Sept. 30. Revenue dropped about 30%, though the money manager returned to profitability in the second half of 2009.
In a Dec. 15 presentation, he announced a restructuring that included refocusing Deutsche Asset Management's real estate subsidiary, RREEF, around core competencies. Mr. Parker also said that the firm planned to strengthen Asian operations centered on Harvest Fund Management Co. Ltd., a Beijing manager that is 30% owned by the company and has about $30 billion in assets under management.
In addition, Deutsche Asset Management will continue moving primary investment management activities to Frankfurt, shifting the focus from London and New York to gain efficiency and cut costs.
“The purpose of the changes is to return the business to pre-crisis profitability,” according to a source familiar with the plans, who asked not to be identified.
FIRST STEP
At Morgan Stanley, a first step to overhaul the business was taken last year when it sold off its largely domestic retail-fund-management operations, including Van Kampen Investments.
Morgan Stanley Investment Management itself may be sold, analysts and recruiters said.
Its parent company, Morgan Stanley, appointed Gregory Fleming as president of investment management. Mr. Fleming, who will join the firm this month, is best known for his key role in
BlackRock Inc.'s 2006 acquisition of Merrill Lynch Investment Management while he was at Merrill Lynch & Co. Inc.
It isn't clear whether Mr. Fleming will try to cut a deal similar to the BlackRock/Merrill Lynch transaction, in which Merrill Lynch sold the asset management operations to
BlackRock but retained a stake in the combined company.
“That's got to at least have been a consideration” when James Gorman, who became chief executive and president of Morgan Stanley this year, appointed Mr. Fleming, according to one analyst, who asked not to be identified.
Morgan Stanley Investment Management spokeswoman Erica Platt declined to comment.
If Morgan Stanley decides to keep the asset management subsidiary, the firm will need to boost its international assets — maybe through a major acquisition — to stay competitive. Its European operation has taken a beating over the past year, following a series of high-profile departures and cost-cutting measures imposed by the parent company, according to recruiters.
Global assets under management or supervision at Morgan Stanley, after accounting for the sale of Van Kampen, fell last year to $283 billion, compared with $300 billion a year earlier. Revenue has been falling, and asset management hasn't recorded a profit in the past eight quarters.
PRIORITY NO. 1
At Amundi, about 82% of the assets under management come from France and surrounding European countries, according to estimates by Fitch Ratings Ltd.
“Priority No. 1 is to merge [Crédit Agricole Asset Management and Société Générale Asset Management] operations, making sure they don't lose clients,” said Aymeric Poizot, head of Fitch Ratings' Europe, Middle East and Africa fund and asset manager ratings group. “Then [the company] needs to strengthen alpha-generating products to attract a less captive and more demanding group of investors within an international framework.”
Through Société Générale Asset Management, the parent company of TCW Asset Management, Amundi likely has already suffered a setback in the United States over the very public and bitter divorce between TCW and star bond manager Jeffrey Gundlach.
Goldman Sachs Asset Management has been heeding the call for overseas expansion, launching an operation in Brazil in October.
Although Goldman Sachs Asset Management is viewed by analysts as one of the most diversified businesses among bank-owned managers, about 64% of its total assets under management come from clients in North America. Therefore, overseas growth is deemed crucial, according to analysts.
The manager had $871 billion in assets under management, a 9% increase last year, according to the quarterly earnings statement released last month.
In addition to geographic growth, product diversification is also an important theme in Goldman Sachs Asset Management's five-year business plan.
“The basic thesis is that products and styles are cyclical,” Mr. Spilker said.
“So if you're really smart and could predict exactly when and where the cycles would change, then you might be able to run an asset management business [following the cycles],” he said. “But our approach is that we want our clients to know we're there for all the cycles.”
Global investment banks historically have viewed their money management subsidiaries as a way to gain a consistent stream of revenue to counterbalance the volatility expected in the investment-banking operations, analysts said.
But since the September 2008 collapse of Lehman Brothers Holdings Inc., “the assumption that asset management would provide a stable source of revenues proved to be anything but,” said Simon Maughan, analyst at MF Global Securities Ltd. Margins collapsed as the value of assets under management and performance fees suffered.
“Furthermore, the volatility [of margins] followed the same pattern as the volatility of the investment bank,” Mr. Maughan added. “The rationale is flawed, and many [investment banks] are questioning what to do.”
CORE QUESTION
Banks also need to raise capital, so “there's a lot of discussion by banks around the question of whether asset management is a core part of their businesses,” said Charlotte Quiniou, a director in Fitch Ratings' EMEA fund and asset manager rating group.
However, there are equally strong arguments for investment banks to hang on to their asset management divisions in the long term, said Ted Gooden, managing director of asset management merger advisory firm Berkshire Capital Securities LLC.
“You've got competitive advantages of a global distribution network and brand recognition,” he said.
“As international expansion becomes more important, the ability to bring a global reputation to various parts of the world is a huge advantage,” Mr. Gooden said. “When entering markets like China or Brazil, they'll know the iconic brands.”
Thao Hua is a reporter for sister publication Pensions & Investments.
