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May 18, 2015 01:00 AM

Investment units looking better to global banks

Sophie Baker
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    Patrick T. Fallon/Bloomberg
    Bob Jain believes banks are less hesitant to promote their money management businesses now because fewer conflicts exist.

    Global banking groups are reinforcing their focus on money management, with a number of recent high-profile announcements set to bring further competition to the world of investment management.

    “Many investment banks are re-examining their asset management arms, hoping to make them more competitive,” said Ben Phillips, New York-based partner at Casey, Quirk & Associates LLC.

    For example, Deutsche Bank AG co-CEOs Jurgen Fitschen and Anshu Jain on April 27 presented their “Strategy 2020.” In it, they outlined six key decisions for the Frankfurt-based bank, including accelerating growth in Deutsche Asset and Wealth Management, which reached e1.16 trillion ($1.26 trillion) in assets under management as of March 31.

    The plan includes investment in people and strategies to capture future growth in the division.

    But it is not just organic growth putting the banking groups back into competition with independent money managers. Last month's announcement that UniCredit Group and Banco Santander intend to merge their money management units under a single, global business attracted attention from analysts.

    The combined entity would manage about a400 billion in assets. “It's likely to compete with the largest players in the industry,” said Francesco Paganelli, Milan-based fund analyst at Morningstar Inc. “The deal might put pressure on competitors” in European money management to consider consolidation of what he said was a fragmented sector.

    Stars aligning

    The renewed focus comes as client attitudes toward those entities also are changing.

    “In the past, many asset owners didn't like placing money with investment bank-owned asset managers. And lots still don't, feeling there are conflicts of interest and noting that investment bank-owned asset managers have had trouble retaining talent because a key unit of their compensation (stock) usually reflects all (of) the business, and not just asset management — so asset management executives feel like their incentives are misaligned,” Mr. Phillips said. That hasn't changed for U.S. endowments and foundations, nor some other asset owners, he said. “But as others seek outcomes that require more capital markets talent, like hedging or risk management, investment bank-owned asset managers are no longer as taboo as they were.”

    Sources at bank-owned money managers agreed. “There had been some cautiousness but that is going away,” said Bob Jain, New York-based managing director and global head of Credit Suisse Asset Management. “One reason for that cautiousness was the idea that there were too many conflicts in a bank. But now, there are far fewer because banks are doing far less business on their balance sheets. It's partly about education. I spend a lot of time educating consultants on the types of specialized products that we can offer only because we are banks.”

    “Some of the gatekeepers used to like the small, nimble, independent asset managers, but we are seeing some acceptance from them that we hadn't seen in the past,” said Randy Brown, global head of insurance and pension solutions, London, for Deutsche Asset and Wealth Management. Mr. Brown attributes that in part to the increased scrutiny and regulation under which banks operate.

    Much of that regulation relates to the global financial crisis, which resulted in increased restrictions on certain areas of banks' operations. While many banking groups had money management units at that point, the crisis led to them taking a closer look at their offerings.

    “The universal banks and investment banks with stronger asset management arms found that analysts rewarded them for that with higher valuations during the crisis,” Mr. Phillips said. “With low capital intensity and high margins, the asset management business attracts higher multiples than transaction-oriented investment banking business, making it more valuable as part of a portfolio of business lines that investment banks maintain.”

    However, one investment consultant said there are a number of requirements that he looks for before feeling comfortable with a money manager.

    “We would like to see (a bank-owned) asset management arm with full autonomy to run as it wants, to hire people for its funds, and with great resources and infrastructure behind it,” said Nicholas Ridgway, London-based head of investment research at Buck Consultants. Mr. Ridgway added that alarm bells would ring if a money manager is pressured to run particular strategies by its banking parent, or with a business model dictated by the owner. “Banks are realizing that, where the margins are being squeezed in day-to-day work, their asset management business is more profitable relative to overall profits (than) pre-crisis. (If they are) trying to get this juice out of their asset management arm (to compensate for losses elsewhere,) they may put undue pressure to gather more assets or run riskier products that are not in line” with their traditional way of doing things, he said.

    After the crisis, a number of banking groups restructured their businesses, bringing together asset and wealth management units, and in some cases joining up other relevant parts of the firm.

    “Senior management has been clear all along the way that we have to have balance to our business,” said Paul Price, global head of distribution at Morgan Stanley Investment Management, London. “It has been a steady addition to the entire banking group for 40 years, and continues to bring consistent revenue.”

    Aware of concerns

    Mr. Price is also aware of the concerns that consultants and asset owners may have had about bank-owned money managers in the past, but MSIM, which has $406 billion in assets under management or supervision, is clear on its strategy as an investment manager. “We have never tried to be a completely broad-based asset management firm, with all the capabilities. If we feel that we cannot be best in class, then we deliberately do not have it as a core capability.” MSIM also has strict controls on fund capacities, and an insistence that portfolio managers co-invest in their portfolios.

    The firm built out its U.S. distribution operations, increasing to almost 100 staff members from 20 or 30 over the past 18 months. “Although it is still in the early stages, we are beginning to see that work pay dividends,” Mr. Price said.

    Deutsche Bank is also in a position to capitalize on its focus on money management, particularly in the U.S. “We have a very strong franchise in Germany and Europe in terms of providing solutions to pension funds, but that is less developed in the U.S., as we have never really exported it. I'm now working on taking that to the U.S. market,” Mr. Brown said. He is also adding talent.

    Credit Suisse Asset Management, which has 391.7 billion Swiss francs ($419.7 billion) in assets under management, is focusing on growth in three areas: “Alternatives to fixed income, such as loans, commodities, insurance products and hedge funds; "quantamental' — quant strategies with a fundamental oversight; and illiquid strategies like real estate and infrastructure,” Bob Jain said.

    Credit Suisse Group is also keeping hold of the key talent by making space in its money management arm. “By the end of this year, we will have moved about 150 people on nine teams from the investment bank to asset management. Those groups are managing more than $12 billion of assets. They've been moved because their strategies are capital-intensive and under new regulations, they can use client rather than on-balance sheet capital for their businesses,” Bob Jain said.

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