For their part, Pareto executives said the deal will allow them to focus on their core currency products, alleviating the pressure they felt as an independent company to diversify into areas such as high-yield bonds. In a separate deal, Pareto, New York, sold to MacKay Shields LLC, New York, the high-yield bond operation it picked up from Forstmann-Leff International Inc., New York, in February 2000.
Ravi Akhoury, MacKay Shields' chairman and chief executive officer, said global high yield is a growing part of the market and will complement his own company's successful U.S. high-yield strategy, which is facing capacity constraints with roughly $15 billion in assets under management.
The union of Mellon's $21 billion currency operation — plus its muscular distribution capabilities — with Pareto's $35 billion currency business could bolster both parties, observers say.
Competitors say Pareto's success in marketing products to manage the risks of holding foreign stocks and bonds has proved a double-edged sword in recent years, as interest shifted to tapping currency as a source of added returns. Four years ago, it was all about controlling risk, but "what people are after now are alpha strategies," said an executive at a Boston-based money manager who requested anonymity.
In recent years, competitors such as State Street Global Advisors, Boston, and Bridgewater Associates Inc. Westport, Conn., have racked up stronger growth in assets under management — albeit from a smaller base.
Mellon's own operations have targeted those alpha strategies: "We treat currency as a separate asset class with unique expected return, risk and correlation characteristics," the company's website says.
Stronger ties "make sense for Mellon and Pareto," said Rick Roberts, a partner with First Quadrant LP, Pasadena, Calif., which fields currency and global tactical asset allocation products. "The question in investors' minds will be how soon the two cultures can blend into a strategy that has broader applications."
Mellon's Mr. O'Hanley said his company "has no grand strategy to combine these two processes," but he added that one goal is to create the kind of environment where the various operations can share ideas and come up with innovative products.
Several industry players questioned Mellon's plan to purchase the 40% stake now held by Pareto's senior managers. All other things being equal, it's "very curious that the Pareto professionals would sell their equity interest in a successful business," said Chas Burkhart, chairman of Rosemont Partners, West Conshohocken, Pa, a private equity firm focused on the asset management industry.
Pareto's own website touts the importance of employee ownership: "Pareto is in large part owned by its senior management," a structure that "gives key members of the firm a sense of ownership and therefore a long-term commitment to the firm."