Mellon's assets swelling, but high-fee areas keep struggling

Mellon Capital Management Corp.'s 46% growth in assets under management during the past 2½ years has helped the firm move further away from the dark days of the financial crisis.

Net inflows of $41 billion from institutional investors increasingly moving into index strategies have fueled the asset growth, as have $63.6 billion from market returns, said Gabriela Franco Parcella, CEO and chairwoman of the San Francisco firm.

Assets under management went into a freefall during the financial crisis: Its AUM of $139.5 billion on Sept. 30, 2008, was down almost 40% from a year earlier, according to data from eVestment LLC, Marietta, Ga.

When Ms. Parcella took over in March 2011, assets had risen to $229 billion, and the $333.9 billion as of Sept. 30, 2013, was the highest in the firm's 30-year history at that point. (Assets have increased further to $349.4 billion as of Oct. 31.)

“It's huge and really exciting for Mellon Capital,” Ms. Parcella said in a recent interview.

But assets in Mellon Capital's higher-fee businesses, such as hedge funds and absolute-return strategies, are still significantly below their pre-crisis asset levels, according to sources and eVestment data.

Mellon Capital's asset are key for its parent, Bank of New York Mellon Corp. Mellon Capital has the second-largest asset base of the 16 boutique money managers owned by BNY Mellon and is one of the top revenue generators among the money management group, said sources with knowledge of the company's operations.

But those sources say senior management at BNY Mellon has been concerned about Mellon Capital's ability grow its higher-fee alternatives business. Nearly 90% of the firm's assets are in passive strategies, with $33 billion in higher-fee active strategies such as hedge funds, absolute-return and asset allocation strategies, company data show.

A flagship Mellon Capital active multiasset institutional strategy, the Global Alpha Strategy, reported assets of $35.4 billion as of Sept. 30, 2007, according to eVestment. Six years later, the strategy had assets of $10 billion and is still experiencing outflows, eVestment numbers show.

Several sources said Mellon Capital's high-fee hedge fund business also has seen a decline. Assets are about $2.5 billion currently, down by more than half since before the financial crisis, they said.

“After 2008 investors have responded with skepticism to active management by moving more to passive fixed-income and passive equity strategies (which is reflected in our growth in AUM in those categories) and away from active multiasset strategies,” said Vassilis Dagioglu, a managing director and head of asset allocation at Mellon Capital, in an e-mailed response to questions.

Mr. Dagioglu said the company is finding renewed interest from institutions in its multiasset capabilities with new asset classes and strategies such as active commodities. Some of those new strategies are still struggling to make their mark: Two active commodities strategies had around $210 million in AUM as of Sept. 30, company data show.

Mellon Capital's success in its indexing business does have a strong positive. Institutional clients increasingly are asking the firm for custom strategies, which command higher fees. Ms. Parcella said institutional clients want indexing strategies that can outperform various benchmarks without the risks associated with active management. Mellon Capital statistics show custom indexing strategies more than doubled to $108.4 billion as of Oct. 31, from $52.8 billion as of June 30, 2012.

BNY Mellon does not break out revenue or profits for its separate money management boutiques, which accounted for $1.5 trillion in total assets as of Sept. 30 under the BNY Investment Management umbrella. Investment management services accounted for $290 million of pretax profit in the quarter ended Sept. 30. Investment services, such as custody operations, accounted for $800 million of pretax profit in the third quarter, the company reported.

Ms. Parcella, an almost two-decade veteran at Mellon Capital when she was promoted from chief operating officer to CEO in March 2011, said she and senior officials decided then that one key strategy was to expand Mellon Capital's international business.

That strategy seems to be working. AUM from overseas clients has risen to $88.3 billion as of last month from $26.1 billion in March 2011, company statistics show. Money came from existing clients as well as new clients, Ms. Parcella said.

AUM from sovereign wealth funds, which stood at $22.7 billion in March 2011, now is $79 billion, including $21.6 billion in net inflows in the 2½ years.

Ms. Parcella, a first-generation Mexican-American who speaks fluent Spanish, has used her language skills in Chile and Mexico to court institutional money. She said the in-person visits helped Mellon Capital to become one of three managers that shared a $4.5 billion allocation from Banco Central de Chile, Santiago, in late 2011. Ms. Parcella would not say how much Mellon Capital received but did say the firm has gotten more money from the Chilean bank since the relationship started.

Mellon Capital has a fabled history. Its founders, William Fouse and Thomas Loeb, are recognized as among the pioneers of indexing and asset allocation strategies. Consultants praise Mellon Capital for its strong investment teams but say the firm has been overshadowed in recent years by the two largest index managers, BlackRock Inc. and State Street Global Advisors.

Both firms were able to use marketing might and strong cross-selling capabilities to attract money to their index strategies — more than $2.3 trillion for BlackRock and $1.6 trillion for SSgA, according to Pensions & Investments data as of June 30.

Key to both BlackRock's and SSgA's indexing gains were their strong forays into the exchange-traded funds business, said Neil Rue, the Portland, Ore.-based managing director for investment consultant Pension Consulting Alliance. Mr. Rue said that while BlackRock and SSgA became the world's largest ETF providers, Mellon Capital largely stayed out of the business.

“I believe BlackRock and State Street as marketing organizations were much more aggressive in pursuing the ETF market than Mellon Capital when the ETF market was in its infancy,” he said.

Ms. Parcella said Mellon Capital subadvises investments for several ETF providers, including those run by WisdomTree Investments Inc. and Curian Capital LLC.

“We didn't go into indexing ETFs because it is a crowded space and we didn't see much opportunity there,” she said. n