The dwindling pool of defined benefit assets and growing demand for both asset-liability matching and absolute returns are forcing change on fixed-income managers grown huge by selling core products to institutional investors.
A structural decline in DB plan flows and a surge in the ranks of pension executives looking to match assets and liabilities are forcing fixed-income managers to revamp their operations, said Salim Ramji, a principal with McKinsey & Co., who helped write a recent report on the future of the asset management industry. Five years from now, more than a quarter of those managers' earnings could come from "pockets of business that they aren't in today," he said.
Within the past year, two of the three members of the oligopoly of top U.S. bond managers — Western Asset Management Co. and BlackRock Inc. — have been involved in mergers aimed at broadening their product lines, distribution channels and geographic footprints. A common theme behind those deals was allowing the firms to move beyond their institutional focus to better tap the growing retail and defined contribution markets, according to industry sources.
In December, WAMCO, Pasadena, Calif., absorbed more than $270 billion in Citigroup Asset Management fixed-income assets as part of a broader swap between parent Legg Mason Inc., Baltimore, and Citigroup Inc., New York. Observers say WAMCO appears to be moving ahead smoothly with its massive integration operation.
In February, BlackRock agreed to absorb Merrill Lynch & Co.'s asset management arm,based in Princeton, N.J., in exchange for slightly less than half of BlackRock's equity.
BlackRock isn't slated to complete its deal until late this year, but industry watchers say the merger will give the New York-based firm much-needed diversification. With Merrill's retail and equity muscle, the deal is a "brilliant" solution for BlackRock, whose dependence on institutional fixed-income mandates had left the firm looking like "a one-trick pony," said Jeb Doggett, a principal with Darien, Conn.-based money manager consultant Casey, Quirk & Associates LLC.