Pesky start-ups, higher costs and weaker markets have left bulked-up money managers searching for growth opportunities.
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Pesky start-ups, higher costs and weaker markets have left
bulked-up money managers searching for growth
By David Lanchner
Institutional Investor Magazine
For the complete Euro 100 ranking results, please go to the
rankings section of this site.
So much for the logic of consolidation.
After several years of poor performance in its value-oriented
portfolios of stocks and bonds, Swiss money manager UBS saw new
money inflows fall and profits decline by 26 percent in 1999.
Europe's largest investment firm has also had to contend with
wrenching change as it tries to bring London-based Phillips
& Drew and Chicago-based Brinson Partners under its own
brand. Tony Dye, who headed Phillips & Drew, and Gary
Brinson, founder and head of Chicago-based Brinson Partners,
resigned under pressure in March, leaving chief executive Peter
Wuffli to integrate the UBS subsidiaries.
"We suffered from some short-term performance issues last
year," says Wuffli. "Even though our value portfolios are now
doing well, we decided to strengthen our global research
platform and expand the range of our investment products. Now
we can offer clients nearly any kind of portfolio they
Like many of its global counterparts, UBS finds itself in a
bind. As it spends freely to create a unified brand name and
deliver the products and services demanded by a diverse,
worldwide customer base, the money management firm is also
competing in a slower-growth, fee-conscious marketplace. And a
new generation of index funds, private equity investors and
hedge players are all vying to claim their own piece of turf.
Then there is talent. Keeping star portfolio managers and their
teams together is increasingly expensive as opportunities open
at rival firms and start-ups. In the background, the world's
running bull market is quickly losing speed and threatening to
turn the financial services marketplace into a war of
"Everyone wants a piece of the European market, largely because
of future prospects for the introduction of pension funds,"
notes Stephen Wilshire, head of European research at pension
consulting firm Frank Russell Co. in London. "But with the
exception of the U.K., Holland and Switzerland, there are still
no real pension funds to speak of in Europe. The pie is quite
small, and the appetite of fund managers is quite large. Until
these markets start diverting assets into funded pension
schemes, competition will be a continuous downward force on
The lack of major new growth opportunities is starting to
manifest itself in the Euro 100, Institutional Investor's
ranking of the largest money managers. While the minimum amount
of assets needed to break into Europe's top five rose sharply
last year, to E649 billion ($545 billion), the growth rate
isn't quite what it seems. (II has, for the first time, used
the euro, rather than the U.S. dollar, as the basis for the
ranking. Because of the decline in the euro and ongoing shifts
in the currency makeup of managers' portfolios, only
generalized year-to-year comparisons here and elsewhere in this
article are possible.) Without fifth-ranked Deutsche Asset
Management's absorption of Bankers Trust Corp.'s investment
unit, the minimum to join this elite group last year would have
risen much more modestly. Aside from UBS (E1.09 trillion) at
the No. 1 spot and Deutsche Bank in fifth (E649 billion), the
top tier includes Axa Group (E781 billion), Barclays Global
Investors (E779 billion) and Credit Suisse Group (E735 billion)
in the second, third and fourth spots, respectively.
And the asset level required to make it onto the Euro 100 list
actually hasn't changed much in the past few years. The minimum
this year is E17 billion, roughly the same level it was at the
end of 1997, given changes in the currency during its two-year
history. "Along with poor growth at industry leaders like UBS,
this is further evidence of increasing competition from upstart
specialist players," says an executive at a U.S. money
management firm. In his view, the contraction at the very top
of the list, together with little or no movement at the bottom,
is a sign that the industry is fragmenting into more firms
managing smaller amounts rather than consolidating into fewer
players handling more. It wasn't supposed to work this
What are the major players planning to do while waiting for
serious local pension fund initiatives to get under way? UBS
and its nearest rivals are directly challenging these smaller
upstarts by launching new products, trying to maneuver around
them by utilizing their global heft and marketing power and, at
times, working with them to provide services that boutiques
simply can't afford to offer. As always, firms are also buying
each other to grow.
Transatlantic relationships have been among the most ardent in
the past year. In addition to seeking a foothold in the world's
largest money management market, European firms crave U.S.
expertise in credit analysis, 401(k) plan administration and
emerging-markets and growth funds -- areas where the Europeans
have considerably less experience. As growth slows in U.S.
asset management, U.S. firms are eager to get access to
promising European pension and retail fund markets. Recent
examples of the transatlantic trend include Munich-based
Allianz's October agreement to buy San Diegobased
Nicholas-Applegate Capital Management for a minimum of $1.08
billion (although that could rise to as high as $2.68 billion,
depending on how fast the U.S. firm grows), as well as
Milan-based UniCredito Italiano's purchase of Boston's Pioneer
Group for $1.2 billion in May. Nationwide Mutual Insurance Co.
in Ohio purchased London's Gartmore Investment Management for
$1.6 billion in March.
Certainly, there is no shortage of new participants stepping up
to take the places of the acquired. Among the more successful,
according to European pension fund consultants, is Och-Ziff
Capital Management, a U.S.-based hedge fund manager that has
set up shop in London. The firm now has about $3.2 billion
under management in the U.S. and Europe. Two other hedge funds
gaining investor attention are Citadel Investments, which
specializes in low-risk arbitrage, and Pendragon Capital
Management, both based in London.
And it's not just hedge funds nipping at the global giants.
"Traditional products that are easily mimicked by passive
investment are seeing their profits squeezed," says David
Salisbury, chief executive of 13th-ranked Schroders.
U.S.-style index funds, which generate about one quarter of the
fees that actively managed funds do, are catching on in the
world. Non-U.S. index funds grew by $40 billion (not including
market appreciation) in the first half of 2000, representing
their biggest six-month gain ever, according to one recent
survey. And there appears to be much room for growth, since, at
$400 billion, the non-U.S. index market is still only one fifth
the size of the $2 trillion U.S. index market. "European
institutional clients and even some retail investors are
increasingly moving to a strategy of holding index funds,
complemented with higher-return, higher-risk specialist funds,"
says James Goulding, CEO of Deutsche Asset Management
The larger firms are responding to the changing marketplace
with products -- particularly in the alternative-assets area --
where fees are much higher. Axa Group, Credit Suisse Group,
Deutsche Asset Management, Merrill Lynch Investment Managers
and UBS have all launched private equity or hedge funds in the
past year or so. "If you go back five years ago, only about 5
percent of new money going to asset managers in the U.S. was
earmarked for hedge funds and the like," says Phillip
Colebatch, chief executive of Credit Suisse Asset Management.
"Today 15 percent of new money going to U.S. asset managers is
going to alternative investments. In Europe, where much less
than 5 percent goes to alternative investments, we expect to
see the same evolution over the next three to five years." One
by-product of more-esoteric funds is the fees. Many of these
funds can charge 20 percent in performance-based fees,
potentially much more lucrative than the 1 percent or less in
flat fees charged for stock and bond funds.
Although operating in a different marketplace, Barclays Global
Investors, which has quadrupled its assets in the past five
years in part because of its powerful position in index funds,
is no less concerned about the ability of new competitors to
cut into already low fees, says chief executive Lindsey
Tomlinson. In addition to moving into higher-fee products, BGI
has focused on items it can offer without absorbing huge
maintenance costs. In the retail market, for example, the
creation of "exchange traded" portfolios allows the firm to
avoid the labor-intensive maintenance of a share registry,
since the funds are bought and sold on stock exchanges.
Going beyond product, some are also attempting to leverage
their substantial equity research departments to get into new
areas. UBS is trying to extend its traditional equity expertise
at Brinson and Phillips & Drew to credit analysis so it can
expand in the growing market for euro-denominated corporate and
high-yield bonds. Axa Group has already had a huge success with
Concerto 1, the company's first European high-yield bond fund.
Targeted at only E350 million, the fund, which was opened and
closed to investors in September, raised E450 million.
Joint ventures are another means of fending off competition and
generating fees. "We are also looking to partner with local
managers who don't have the expertise or manpower to construct
a global portfolio," says UBS's Wuffli. One recent example is a
partnership with Mitsubishi Corp. of Japan. UBS is setting up
global real estate investment trusts that Mitsubishi will sell
to institutional clients in Japan.
Within the past year UBS has reconfigured its research teams at
Phillips & Drew and Brinson along sectoral rather than
geographic lines and is embarking on a major campaign to enlist
multinational clients that have pension assets around the
world. Smaller competitors simply can't offer that kind of
comprehensive coverage. The global corporations and their
employees can choose from a full stable of global and domestic
stock and bond portfolios, as well as from the rapidly
expanding menu of alternative-investment items like hedge
funds, private equity and leveraged real estate portfolios. "We
can provide them with pension products and integrated reporting
throughout the world as well as core global portfolios
supplemented by specialist funds that cut across asset classes
and countries," says Wuffli.