Ronald P. "Ron" O'Hanley joined Mellon in 1997 after 10 years with consultant McKinsey & Co. Inc., where he was leader of the worldwide investment management practice. In five years, he has helped Mellon Institutional Asset Management more than double in size. Acquisitions and strong markets have helped, but Mr. O'Hanley said the unit has grown organically 15% per year since 1997. Last year, the firm acquired fixed-income manager Standish Ayer & Wood (now Standish Mellon) and established Mellon Growth Advisors, an institutionally focused growth firm led by a team that migrated from State Street Global Advisors. Mr. O'Hanley, a collector of antique maps, charts the course of Mellon Institutional in an interview with reporter Dave Kovaleski.
Q How was the transition from consultant to executive?
A It's one thing to tell somebody to do it, it's another thing to be responsible for doing it. Consultants take a very simple view of the world in some ways. They say, "Listen, we need to grow the revenue line, and manage or shrink the cost line." But there are a lot of other things that go on at the same time in any large organization. Those things can be overwhelming and I spend a lot of time trying to pound those things out of the organization. Anything that doesn't add value to a client or to an employee in our firm, then I start asking why we're doing it.
Q Now that you are on the other side of the fence, have your ideals changed?
A Yes and no. A lot of my beliefs and advice have proven out, particularly a lot of the things I believe about mergers and acquisitions, which is, it's really damn hard so you have to work awfully hard up front. I'm always very skeptical when I hear about these deals that were done over a weekend, or where someone has swooped in and "got it done."
I think where my beliefs have changed somewhat is where the real economies of scale are in the business. There are some economies of scale and I also believe there are some diseconomies of scale, which I hadn't quite recognized before. On the investment side of the business, I think there are more diseconomies of scale than economies of scale. When companies get too big, have too many products, and too many assets either their performance suffers or they're cost per unit of alpha goes up as opposed to down.
Coming into Mellon and seeing there were six investment subsidiaries, my belief was there's got to be a way to somehow rationalize this. It didn't take me long to realize that this actually was a brilliant strategy from an investment standpoint. Separate subsidiaries, organized around an investment process, was exactly what you needed to be successful in investments. What you needed to figure out though, was how are you going to satisfy the demands of other areas where there are real economies of scale, i.e. distribution.
That kind of insight has really driven our strategy since early 1997. While we maintain that separate subsidiary structure, we share things like distribution channels and key IT investments.
If you look at Mellon overall, about 90% of what we do is serve the institutional client whether it's in money management, custody, cash management, or treasury services. So, we source a lot of our business from other parts of Mellon and that's a huge potential for growth. That's a big difference with our model. For the last three years, our single largest source of new business has been our custody client base.
Q What is your acquisition strategy?
A We've been described as kind of an acquisition machine, but we only acquire to fulfill our strategy. We want to have a broad range of high-quality investment products, so we'll either acquire to fulfill a product need, acquire to fulfill a distribution need, or first prize is when we get both. I would use Newton Investment Management Ltd., London, as an example of where we got both. In the end, what you need is good investment performance and then good distribution, I don't believe this business can be sustained by continuing to acquire and acquire. You need to have an organic growth capability.
Q Where do your two newest subsidiaries, Standish Mellon and Mellon Growth Advisors, fit in?
A We had plenty of fixed income before Standish, in a broad sense, but if you look at Mellon Bond, it's focused on the short end and bond indexing and has very little core fixed income. Dreyfus Corp. has quite a bit of fixed income also, but Dreyfus is very retail oriented.
Mellon Growth Advisors is different in that we did not have an institutional growth capability. We certainly had growth at Founders Asset Management LLC but the issue with Founders is a lot of its products are capacity constrained. Our goal is not to keep collecting these businesses. It's to have sufficient capacity in a broad range of products.
Q What holes are you looking to fill?
A Most of our attention at this point acquisition-wise is outside the U.S., in the area of non-U.S. distribution. We've got a very strong platform now in the U.K. and in Europe but there's always room to augment that.
Q What challenges do you face?
A The challenge for each company is to determine how effective and how productive it is at manufacturing alpha. I don't believe the industry can rely on a constantly rising market to support the cost of producing the alpha. In some sense a rising market was an annual hidden price increase for the client. I think its going to force a lot of firms to really look at their costs. It's going to put the spotlight on the investment process and beg the question: Is the investment process engineered properly?
Q What are your hobbies?
A I'm an avid sailor. I've sailed up and down the East Coast, ... done a little bit of sailing in Australia, done a little bit in South America. Sailing is in some ways like money management. It's a very knowledge-intensive kind of pastime. The beauty of it is not in the destination, but in the journey.
I also collect maps. I have a lot of antique maps, particularly some of the early 16th and 17th century Dutch and German maps. Maps are great because they are a picture of the world as best understood at the time and a reflection of how people looked at the world at the time.