New Wells Fargo Asset leader aims to expand multiasset capabilities
Kristi Mitchem, more than 12 months into her tenure as head of Wells Fargo Asset Management, can look back at a year that held an acquisition; the merger of three asset management divisions; and the fallout from a scandal on the retail banking side of parent Wells Fargo & Co.
The deal for WFAM to acquire Analytics Investors was being negotiated when Ms. Mitchem took over as president and CEO of the $491 billion WFAM in June 2016, after the retirement of Michael J. Niedermeyer, who had served as its leader since 1994. The acquisition was announced in August and closed in October 2016. Ms. Mitchem had been an executive vice president at State Street Global Advisors, where she led the Americas institutional client group.
Meanwhile, her immediate boss, David Carroll — who until his retirement last month was senior executive vice president and head of wealth and investment management — had charged Ms. Mitchem with conducting a review of the firm's operations with an eye toward merging its three separate divisions. (Mr. Carroll was replaced by Jonathan Weiss, who had been the head of Wells Fargo Securities, effective July 1.)
By December, she had completed that task, combining institutionally oriented Wells Capital Management with the funds management unit and its affiliated managers unit, which included hedge fund-of-funds manager Rock Creek Group and stable value manager Galliard Group.
"We are now one asset manager," said Ms. Mitchem, who added the move allows for better coordination with investment and distribution teams and will result in new investment strategies.
A key part of her plan for WFAM is an expanded multiasset solutions investment team, which now manages $28 billion. Ms. Mitchem hired Nicolaas Marais, naming him president of WFAM. Mr. Marais will take on a broad range of responsibilities, including leading the multiasset solutions team and developing investment strategies with the fundamental investment teams and subsidiary Analytic Investors LLC, Ms. Mitchem said. Mr. Marais had been the head of multiasset investments and portfolio solutions at Schroder Investment Management.
Expanding the solutions team is a good idea, said James Sinegal, an investment analyst with Morningstar Inc., Chicago. "Wells' asset management group has traditionally been stronger in fixed income and liquidity, which generally carry lower fees than some other areas," Mr. Sinegal said in an email. "They are obviously dealing with the same industry trends as competitors, especially the rise of passive, but I like their strategy in this area. They are focused on growing in areas where some form of 'active' management still adds value, including multiasset strategies and outcome-based investing in general."
"My personal view is that the level of 'active' management is just changing; rather than individual security selection, investors are now paying for solutions," he added. "Wells is headed in this direction."
The retail banking cross-selling scandal that engulfed Wells Fargo Bank in August 2016 only resulted in the loss of a few clients at WFAM, Ms. Mitchem said. But the real impact was on prospective institutional clients who didn't consider the firm as a finalist for investment management contracts.
"This is a very competitive industry, and it's always a game of inches," she said. "And the types of headlines that we have seen around Wells Fargo I think can have an impact, in terms of opportunity cost."
"I do believe the impact on the asset manager has been very limited," she continued. "But if you're asking me where we have felt it, it's not with existing clients — it's with prospects." She was not able to estimate how much potential business was lost.
One institutional investment consultant, who deals with public pension plans, said pension systems don't want the "headline risk" they would potentially face from hiring WFAM. The consultant, who asked not to be identified, said hiring the firm could raise questions from the press, the public and politicians, given the scandal at the community bank.
He said it would likely take several years for the unit to distance itself from the matter.
And Ms. Mitchem is facing that issue — which cost Wells Fargo & Co. CEO John Stumpf and other senior Wells Fargo officials their jobs — head on.
"I apologize to clients, first and foremost, because even though the issues that are of concern did not impact the asset manager, the headlines impact each and every client we have," she said. "So, I start first with an apology and with an acceptance that even though I've only been at Wells Fargo for about a year, I have to take responsibility for rebuilding the trust that our clients have in our institution."
While some states and cities have suspended Wells Fargo from bond underwriting and investment activity due to the scandal, there have been no formal actions by pension boards.
She said a combination of factors ultimately will move the asset management unit forward, away from the negative events at the bank: "I think it's time, effort and humility."
But poor performance, particularly in some WFAM's target-date funds, also seems to have hurt overall assets under management. The firm had $481 billion as of March 31 vs. $496 billion at the end of 2014, Well Fargo statistics show.
Net outflows have been severe in the main target-date fund series, the Wells Fargo Dow Jones Target Date Funds. A total of $8.6 billion flowed out of the target-date complex in 2016 and the first five months of 2017, leaving only $7.5 billion, according to Morningstar data.
The biggest outflows have come from the Target 2025 Fund, more than $1.6 billion in the 17 months ended May 31. The fund's one-year return as of June 30 was 6.67% compared to the Dow Jones Global Target 2025 Benchmark of 7%; it reported an annualized three-year return of 3.2% vs 3.5% for the benchmark; and a five-year annualized return of 6.6% vs. 6.9%.
Ms. Mitchem said WFAM is revamping the target-date series and as of mid-July will manage the funds itself, eliminating subadvisers State Street Global Advisors and Global Index Advisors.
WFAM will be leveraging the skills of Analytic Investors, using custom factor-based indexes to guide security selections across asset classes, she said. The use of the Analytic Investment's indexes is one example of what can be done when investment teams work together in various investment disciplines at WFAM, she added.
In a June 8 research report, Morningstar analyst Jeff Holt noted the new investment team that will run the target-date funds has limited experience in that area. The three-person team started running WFAM's dynamic target-date series only in late 2015, he said. (The dynamic series has combined assets of less than $65 million.)
Mr. Holt also questioned the use of factor-based strategies: "Few target-date peers ventured so wholeheartedly into factor-based investing, and the efficacy of combining these untested strategies remains unknown."
Barbara Delaney, a principal with consulting firm StoneStreet Advisor Group LLC, Pearl River, N.Y., said WFAM has cut its expense ratio significantly for the new target-date funds, to 0.19 basis points from the current 0.30 to 0.37. It is joining other target-date providers in cutting fees as a way to attract new business, she said.
Although WFAM has close to $500 billion under management, that pales in comparison to to other bank competitors like Bank of New York Mellon (BK), which has $1.7 trillion under management, and JPMorgan Chase & Co., whose asset management unit runs $1.84 trillion, said Brian Kleinhanzl, a managing director and equity analyst with Keefe, Bruyette & Woods Inc., New York.
"It's a scale business," he said. "In order to increase profit margins, Wells Fargo would need to increase their assets."
Overall, WFAM's revenue amounts to about $1 billion a year, a small chunk for a bank with $90 billion in revenue annually, Mr. Kleinhanzl said, giving asset management leaders a challenge to build a bigger business.
WFAM also needs to build its alternatives business to grab more inflows from investors, he said, noting the firm's alternatives assets are only about 5% of total AUM.
"They have a small amount compared to peers," he said.