NEW YORK - Morgan Stanley Group is increasing its emphasis on asset management, featuring a strong push into the defined contribution market.
Its money management subsidiary, Morgan Stanley Asset Management, is moving to expand its position in the defined contribution asset management business, offering institutionally priced mutual funds to large plan sponsor structured along the lines of its successful separate account strategies.
Anticipating plan sponsor reaction to the fees charged by mutual fund companies, and added emphasis on an institutional approach to defined contribution asset management, Morgan Stanley will market the firm's 45 institutional mutual funds using its fee structure as a "key competitive edge," according to Ruth Hughes-Guden, principal at MSAM and who was hired last year to head the firm's defined contribution marketing effort.
Ms. Hughes-Guden spent the previous 13 years at RogersCasey, Darien, Conn., as head consultant for defined contribution plans.
"When I joined MSAM there was very little defined contribution (assets). My mandate is to expand that," said Ms. Hughes-Guden. Of the $104 billion under management at the firm, only $3.5 billion is from defined contribution plans.
Ms. Hughes-Guden said plan sponsors are more conscious of the fees associated with the use of mutual funds in defined contribution plans.
These fees usually are the same or close to those paid by retail investors.
"Defined contribution plans should philosophically be managed like defined benefit plans. Clients are going to be looking more and more at institutional management" of defined contribution assets, she said.
"Mutual funds are extremely expensive and we expect fees to become more of an issue; that will help Morgan Stanley position itself. The whole idea of institutionalization of defined contribution plans will become much more significant in terms of investments. All the things plan sponsors have learned on the defined benefit side will start to be applied to defined contribution plans, particularly among larger plans," said Ms. Hughes-Guden. "You are going to find defined contribution investment options looking more like defined benefit options."
401(k) plan sponsors also are looking more carefully at defining asset allocation issues, diversification of assets and style risk, and "Morgan Stanley has a tremendous ability to offer that," she said.
With its recent acquisition of Miller Anderson & Sherrerd, West Conshohocken, Pa., Morgan Stanley has more than 45 institutional funds covering a broad range of asset classes on a worldwide basis. Morgan Stanley's traditional strength on the defined benefit side has been in its non-U.S. investment capabilities, while Miller Anderson is known for its domestic management.
The next step is for Morgan Stanley to capitalize on its strength with defined benefit sponsors to make headway in the defined contribution end of the business.
"We want to be able to cross-market as much as we can. But we are going with our strengths and want primarily investment-only business with the larger plan sponsors," she said.
The approach will not involve unitization of defined benefit plan investments, she said. Morgan Stanley will replicate successful asset management strategies in the institutional funds, "using the same strategy but in a different format."
Pricing clearly is the centerpiece of Morgan Stanley's defined contribution marketing approach.
For example, the Morgan Stanley value portfolio carries a total expense ratio of 61 basis points; the midcap portfolio, 88 basis points; and the equity growth fund, 80 basis points. Its widely recognized international equity portfolio carries a 100 basis-point expense ratio. The fees include asset management expenses.
The MSAM funds offer daily pricing in two classes of shares. The A class shares require a $500,000 minimum investment and B shares, $100,000. The B shares also carry a distribution charge for plans that are seeking record-keeping services, she said.
"My whole strategy is to make sure the institutional client knows what they are paying for," said Ms. Hughes-Guden. "They will have the convenience of daily valuation without paying higher retail fees."
Robin Pellish, managing director-consulting at RogersCasey, said mutual fund companies usually assess retail fees to defined contribution plan participants, although large plans sometimes have access to alternative, somewhat lower cost options such as "clone" funds or separate account management by mutual fund companies. But, she said, for most plans, the fees are at or near retail levels.
Rich Koski, benefits consultant with Buck Consultants, New York, said fees for actively managed equity mutual funds range up to 120 basis points, with international funds costing even more. Other types of funds such as small-cap funds frequently charge fees of at least 200 basis points. Lifestyle funds, he said, may assess fees on the underlying funds plus an extra 20 basis points for administrative purposes.
Ms. Hughes-Guden said Morgan Stanley has yet to determine how it will serve the midsized plan sponsor - between 1,000 and 5,000 participants - saying the firm is "open" and "if someone wants full service, we are assessing how we will provide that. We want to be able to provide that service on an opportunistic basis but most of our business will be investment only."
She said investment education and communications will be available because Miller Anderson "has an excellent full service communications product."
Defined contribution is one area of real strategic importance for Morgan Stanley, said James Allwin, who recently was appointed head of asset management for Morgan Stanley Group. The parent company is increasing its emphasis on money management and wants to integrate its product lines better to improve cross-selling and product development, he said.
Mr. Allwin was appointed to head Morgan Stanley's asset management area in a restructuring that consolidated all its asset management businesses into one area apart from its securities businesses. The asset management area includes MSAM, Miller Anderson and Van Kampen American Capital Management, Oakbrook Terrace, Ill.; as well as the private client services, merchant banking and Morgan Stanley Services units.
The reorganization recognized the importance of asset management, said Mr. Allwin.
"(It) was a statement that we had the size and the critical mass so that those businesses should be separate and distinct from the securities side of Morgan Stanley," said Mr. Allwin. "(But) within that separateness and distinctiveness, the strategy is one of having those businesses work together."
Morgan Stanley has $180 billion in assets under management, nearly half of which were brought in through the acquisitions of Miller Anderson and Van Kampen in the last two years.