Bank-owned asset management firms hustle to earn their keep

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,” according to Kevin Pakenham, managing director in the investment banking division at Jefferies & Co., Inc., based in London. “Thus bank-owned asset managers will seek to prove their independence and their viability.”

At the same time, governments — particularly in the U.S. — have signaled their intentions to further separate the various businesses that are now combined within investment banks. While details have not been proposed, some analysts believe higher legal barriers could restrict the ability for bank-owned managers to cross-sell to investment banking clients. President Barack Obama last week proposed changes that could force some banks to sell their private equity and hedge fund operations.

Deutsche Asset Management, Morgan Stanley Asset Management and Amundi Asset Management — the firm formed Dec. 31 as a result of a merger between Credit Agricole Asset Management and Societe Generale Asset Management — are the latest examples of bank-owned managers in the midst of reshaping their businesses.

Goldman Sachs Asset Management, while not restructuring, is ramping up recruitment with ambitions to double its business in the next five years, according to Marc Spilker, co-CEO and co-head of Goldman Sachs Asset Management based in New York.

DeAM’s CEO Kevin Parker, who is based in New York, is implementing strategic changes aimed at turning the company around. Assets under management remained flat at €476 billion ($674 billion) for the nine months ended Sept. 30. Revenue dropped about 30%, although the money manager returned to profit in the second half of 2009.

In a Dec. 15 presentation, Mr. Parker announced a restructuring that included refocusing RREEF, DeAM’s real estate subsidiary, around core competencies. Mr. Parker also said the firm planned to strengthen Asian operations centered on Harvest Fund Management Co. Ltd., a Beijing manager 30% owned by DeAM with about $30 billion in assets under management. In addition, DeAM 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 named.

First step
At Morgan Stanley Investment Management, New York, a first step to overhaul the business was taken last year when MSIM sold off its largely domestic retail fund management operations, including Van Kampen Investments.

MSIM itself may be sold, analysts and recruiters said. New York–based parent company Morgan Stanley appointed Gregory Fleming as president of investment management. Mr. Fleming, who will join the firm next 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. (Merrill Lynch was acquired by Bank of America in 2008.)

It’s not clear whether Mr. Fleming will try to cut a deal similar to the BlackRock/MLIM 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 CEO and president of parent Morgan Stanley earlier this year, appointed Mr. Fleming, according to one analyst who spoke on the condition that he not be named. MSIM spokeswoman Erica Platt declined to comment for the story.

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 to $283 billion by Dec. 31, compared with $300 billion a year earlier. Revenue has been falling and asset management hasn’t recorded a profit in the last eight quarters.

Priority No. 1
At Amundi, about 82% of the €650 billion assets under management come from France and surrounding European countries, according to estimates by Fitch Ratings Ltd. “Priority No. 1 is to merge (SGAM and CAAM) operations, making sure they don’t lose clients,” said Aymeric Poizot, head of Fitch Ratings’ Europe, Middle East and Africa fund and asset manager rating group, based in Paris. “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 SGAM, the parent company of TCW Asset Management, Amundi has likely already suffered a dramatic setback in the U.S. over the very public and bitter divorce between TCW and star bond manager Jeffrey Gundlach.

GSAM has been heeding the call for overseas expansion, launching a Brazil operation in October. Although GSAM 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 for the year ended Dec. 31, according to the latest quarterly earnings statement released last week.

In addition to geographic growth, product diversification is also an important theme in GSAM’s five-year business plan.

“The basic thesis is that products and styles are cyclical,” Mr. Spilker of GSAM 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 they cycles). But our approach is that we want our clients to know we’re there for all the cycles.”

Global investment banks historically viewed their money management subsidiaries as a way to gain a consistent stream of revenue to counterbalance the volatility expected on 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. based in London. Margins collapsed as the value of assets under management and performance fees both 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, director in Fitch Ratings’ EMEA fund and asset manager rating group based in Paris.

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, New York.

“You’ve got competitive advantages of a global distribution network and brand recognition,” Mr. Gooden said. “As international expansion becomes more important, the ability to bring a global reputation to various parts of the world is a huge advantage. When entering markets like China or Brazil, they’ll know the iconic brands.”

[This story first appeared in Pensions & Investments, a sister publication to InvestmentNews.]