Spinoff to shed American Express name

MINNEAPOLIS — A yet-unnamed money management firm will be launched later this year with at least $366 billion in assets under management.

The huge firm without a name will be formed from the spinoff by American Express Co. of its American Express Financial Advisors unit. Amex's institutional money management, mutual fund and defined contribution businesses are included in the deal, as is Threadneedle Investments, the U.K.-based money manager with £62.8 billion ($118.2 billion) in assets under management as of Dec. 31, 2004.

American Express Financial Corp., the entity that responds to Pensions & Investments' money management surveys, had more than $366 billion under management at the end of 2003, according to the latest P&I data. Amex officials wouldn't provide updated assets under management, but its financial statements say the company had $412 billion in owned, managed and administered assets as of Dec. 31.

Its American Express Retirement Services unit had $31.4 billion in defined contribution assets at the end of 2004, and AEFA, including its American Express Asset Management business, has $12 billion in U.S. institutional separate account and CDO assets under management as of Oct. 1, 2004, said Paul Johnson, spokesman. He added that AEFA had $2.5 billion in alternative assets, including fund-of-funds and single strategies, at year end.

Although American Express officials won't release their valuations, Morningstar Inc., Chicago, values AEFA at between $9.5 billion and $10 billion, based on 13 times 2004 earnings, said Ryan Batchelor, Morningstar financial services analyst.

The firm will be a separate public company and will keep its headquarters in Minneapolis. Key personnel won't change: James Cracchiolo will remain chairman and chief executive officer of the unit; William F. "Ted" Truscott, chief investment officer; and Ward Armstrong, head of the defined contribution business.

In an interview, Mr. Truscott said that although Amex will retain no stake in the new firm, the parent has committed to providing the "appropriate levels of capital" to launch it as an independent company. He declined to elaborate.

Mr. Cracchiolo said in a Feb. 1 conference call that the new company will be known initially as American Express Financial, but company officials will develop a new name after the deal is done. Following a transition period, the name will no longer include the American Express moniker.

One question is whether the firm will be better or worse off without the American Express name.

Mr. Armstrong, president of American Express Retirement Services, acknowledged a tradeoff. The association with American Express as a large, recognizable corporation has brought confidence to many clients, said Mr. Armstrong, but he's glad he'll no longer have to answer questions about how retirement services are pertinent to a credit card company.

"Strategic relevance is important," Mr. Armstrong said. He said his side of the business will remain heavily focused on work-site education.

Mr. Cracchiolo, in his Feb. 1 conference call, said the new public firm "will have greater flexibility to drive its strategy and to pursue investment opportunities to grow."

Client reaction has ranged from positive to neutral, Mr. Truscott said. For staff, it will be "very much business as usual," he said.

AEFA contacted its clients prior to the public announcement; they appear to be taking a wait-and-see approach.

J.P. Singh, chief financial officer of the $4.5 billion New Hampshire Retirement System, Concord, said fund officials are "still in the process of reviewing" whether there will be changes in service from American Express Asset Management, which runs about $200 million in large-cap growth equity for the system.

Pilot Travel Centers LLC, Knoxville, Tenn., uses American Express Retirement Services as bundled provider for its two 401(k) plans with a combined $18 million in assets. Jack Stalker, director-finance, said he expects it to be pretty much business as usual. "I don't really perceive it as a big minus," he said. Mr. Stalker said Amex officials have promised no change in service.

Bill Schneider, managing director at consultant DiMeo Schneider & Associates LLC, Chicago, said the spinoff will be an advantage if the new firm has greater independence in choosing the investment products it offers.

Mr. Schneider questioned what might become of the American Express Funds, its 66 mutual funds. He said DiMeo Schneider has "at least one client" that has used American Express as its bundled defined contribution service provider and has been whittling down the number of American Express funds in its stable because of performance problems.

The firm's "mutual funds have been pretty mediocre," Morningstar's Mr. Batchelor said.

He believes the spinoff will be positive for the financial services and asset management groups, allowing them to expand and build momentum in the marketplace.

American Express has about $65 billion in short-term and long-term mutual funds, the largest being the $14.8 billion AXP New Dimensions large-capitalization growth equity fund. That fund returned 3.25% for 2004 and an annualized 0.36% for the three years ended Dec. 31, according to Morningstar data. The fund was below the Russell 1000 Growth index's 6.3% return for one year but surpassed the index's annualized -0.18% over three years.

The $3.1 billion AXP Growth fund posted a return of 8.7% for 2004 and an annualized -0.01% for three years, according to Morningstar, both besting the benchmark Russell 1000 Growth returns.

The $4.1 billion AXP Diversified Equity Income returned 18.4% for 2004 and an annualized 11.25% over three years, outperforming the Russell 1000 Value index's 16.49% and 8.57%, respectively, according to Morningstar.

Mr. Truscott said performance of nearly all of the firm's equity and fixed-income funds has improved during the past three years. The funds "continue to build a track record," he said. He said he believes some of the analysts who criticize the funds' recent performance are "misinformed."