CHICAGO - The sale of ANB Investment Management to Northern Trust shows the powerful interweaving of indexing, custody and securities lending now necessary to compete for institutional clients in the passive management business.
The tentatively priced $50 million deal between index fund pioneer ANB Investment Management & Trust Co. and Northern Trust Co. also reflects consolidation in the indexing business.
"We haven't seen consolidation in active management," despite predictions, said James F. Knupp, principal, Ennis Knupp & Associates Inc., Chicago. "But in indexing - where you can deliver a product with reliability - we are seeing consolidation."
ANB is one of the 10 largest indexers. It has $31 billion in total under management, including $29 billion in index funds. By comparison, Barclays Global Investors, San Francisco, the biggest indexer, has $284 billion.
First Chicago NBD Corp. had several other "substantial" offers from banks for ANB, said J. Stephen Baine, chairman of ANB and president of First Chicago Investment Management Co., ANB's direct parent company. He wouldn't identify the other banks.
The price Northern Trust is paying is contingent on retaining clients, said Stephen N. Potter, senior vice president and director-institutional investment sales for Northern Trust.
"The final price will be adjusted," he said. "First Chicago has an incentive to keep the clients."
What ANB needed
"First Chicago reached a decision six weeks ago that this company (ANB) would be more successful if joined with a leading custodian," said Mr. Baine.
First Chicago concluded for ANB to continue to be successful in index funds it would need a linkage to custody services, a global thrust, a strong mutual fund product array and distribution or a combination of the three.
But Mr. Baine said First Chicago realized it would be difficult to retain its major institutional client base in converting to mutual funds.
"Given ANB's institutional history, the linkage between custody and the global market is a better fit with Northern Trust than First Chicago," Mr. Baine added. First Chicago exited the custody business last year.
Northern Trust indeed hopes the linkage of its existing custodial business and its new wide array of ANB index products will give it an edge to gain passive management clients, Mr. Potter said.
Northern already has some $11 billion in index funds from 100 clients.
But Mr. Potter said its limited index product line has blunted efforts to couple its custody business with indexing. Without an acquisition, extending its index products would take considerable time and resources.
"Indexing is a natural for custodial clients," Mr. Potter said. But because of Northern's lack of a broad product line, he said, "We've been losing out on this type of business."
"The acquisition is predicated on the belief we can grow this through our distribution" in part through custodial clients, James M. Snyder, Northern executive vice president and chief investment officer. "ANB has a more complete product line and track record we didn't have."
Northern expressed an interest to First Chicago more than a year ago about buying ANB, Mr. Snyder said.
How State Street does it
At State Street Global Advisors, Arlene M. Rockefeller, principal and head of global enhanced equities, said, "We benefit from being a global organization and from our big custody relationships. We're one of the largest custodians in the world."
She estimated half of its indexing clients have custodial arrangements with State Street, and some 60% of State Street's new indexing business comes from existing clients.
State Street also benefits in marketing from its huge index product line; it has index funds for 52 countries. Its economies of scale enable it to keep fees down and promote cross-trading to reduce transactions costs.
"Securities lending accounts for some revenue" in its index funds, "but not the majority," Ms. Rockefeller said. "We're not looking to enhance revenue by taking a big risk in securities lending."
Mr. Knupp, with Ennis Knupp consulting, said, "Global custody, not just domestic custody, is a real source of strength for index funds" now.
"I think Northern Trust will do well," he added. "Northern Trust is strong as a custodian."
"Securities lending is very important" to index revenue, Mr. Knupp said. "A recent client (of Ennis Knupp) put $300 million out and the fees were zero," Mr. Knupp said. "The revenues will come from securities lending."
Clients appear to be staying
Both Messrs. Baine and Potter said no major client has indicated it may leave since the acquisition announcement.
Mr. Baine said the timing of the sale also was convenient, because ANB had been making arrangements to outsource custody of its commingled funds with Bank of New York, because First Chicago left that business. Northern Trust hopes to assume that custody.
Northern invited all 75 ANB staffers, including 15 index fund accountants, to continue in their jobs, although Susan O. Jones, ANB chief operating officer, will stay with First Chicago NBD after leading ANB's transition team. Mr. Baine said her next position will be determined after the transition and depend in part on how successful ANB is in keeping clients.
Among its clients, ANB is the adviser to several index mutual funds offered by Federated Investors, Pittsburgh. "I called Federated this morning (the day of the acquisition announcement) and am hopeful they will stay," Mr. Baine said. Federated executives couldn't be reached for comment.
Aside from its index funds, ANB has $1.5 billion in active equities, managed by Neil Wright, who also will be moving to Northern Trust.
ANB to be separate unit
Northern will make ANB a separate unit, tentatively renaming it Northern Trust Global Investments.
Mr. Snyder said Northern wanted to assess the personnel before naming the person to head up the new indexing entity. Mr. Snyder will become chairman of Northern Trust Global Investments and the head of the unit will report to him.
Northern Trust intends to move its existing index funds to the new unit, giving it some $39 billion in index fund assets. Mr. Snyder said no decision is likely for the next year on whether to move the rest of Northern Trust's active equity and fixed-income management to the new unit.
First Chicago has a five-year non-compete clause with Northern Trust on indexing.
First Chicago Investment Management has, apart from ANB, $50 billion under management, including about $15 billion from institutional investors, mainly small and midsize clients.
It intends to continue to focus on active management, Mr. Baine said.
Northern Trust has $160 billion under management, including its $11 billion in index funds. Some $110 billion of the total is from institutional clients.
