For the first time in nearly a decade, the industry can't rely on the market to help boost assets under management.
By Rich Blake and rankings compiled by Erika Ihara and Tucker Ewing
July 2001
Institutional Investor Magazine
In the 1990s money management executives and analysts preached the virtues of scale and the inevitability of consolidation. An asset manager could flourish as a powerhouse operating across many markets or as a tiny boutique: No middling operation could hope to survive. And over the past several years, certainly, midsize firms have been swept up in a flurry of mergers and acquisitions, with each announced deal seemingly bigger than the last.
Once on board, the assets themselves did most of the work. In the 1990s the Standard & Poor's 500 index produced an average annualized return of 20 percent, versus a historical average of 10 percent. Last year, of course, asset management firms suffered through the first negative year for the S&P 500 since 1990, to say nothing of an imploding Nasdaq composite index, which ended the year down nearly 40 percent.
These days, it seems, size isn't everything in money management. The current consensus: Instead of choosing between big and boutique, a money manager must define itself as either product manufacturer or distributor; few firms can effectively do both.
"It's not impossible to be excellent at both, but it has become an increasingly difficult proposition," says Chris Acito, a senior consultant at Darien, Connecticut-based Barra Strategic Consulting Group, which articulated the manufacturer/distributor dichotomy in an industry report authored with Merrill Lynch & Co. "The competitive standards for servicing the relationship and producing good returns have gone up."
Fidelity Investments stands as one of the very few firms that succeeds as both manufacturer and distributor. Despite a decrease in assets under management in 2000 compared with the previous year, Fidelity leads the pack in total assets under management for the ninth consecutive year in our annual ranking of money managers. Fidelity finished 2000 with $886 billion, down from $916 billion at the end of 1999.
"When you don't have the market breathing a strong wind at your back, things like distribution, brand awareness and multiple products in multiple market segments all start to become much more important," says Robert Reynolds, Fidelity's chief operating officer. "We have made the necessary investments to be full-service in every channel in most every market. But it has been expensive, and we have had to be patient. As a private company, we've had the luxury to take a longer-term view; so things we did ten, 15 years ago are paying off now."
"I think 2000 was a true test to see who has the strongest distribution," says Ronald O'Hanley, head of the institutional asset management business of Mellon Financial Corp., which grew assets by roughly $46 billion, while many firms at the top had moderate or no growth. Still, Mellon this year drops one notch to seventh, giving way to J.P. Morgan Fleming Asset Management. That firm moves up to the No. 4 spot from No. 13 last year as assets nearly doubled as a result of merging with Chase Manhattan Corp. Sliding to No. 12 is Putnam Investments, which is the only firm to have been knocked out of the top ten this year. Putnam's assets fell by about $21 billion, to $370 billion.
Otherwise, the top of the rankings changed very little. Index kings Barclays Global Investors and State Street Global Advisors hang on to the No. 2 and No. 3 positions, respectively. Each reported asset increases, mostly new money moving into international equity index products.
"You couldn't hide behind the market in 2000," Mellon's O'Hanley says.
"Marketing muscles got weak over the past decade," adds Anne Moe, president of Seattle-based Performance Marketing, a consulting firm that specializes in helping financial services companies increase revenues. "A lot of money managers seemed to let the market do their marketing for them. Now many of these firms are in cost-cutting modes at a time when they need to be spending on distribution."
The wipeout of wealth - an estimated $4 trillion in U.S. equity assets vanished between March 2000 and March 2001 - inevitably hit money managers hard.
Net redemptions in stock funds reached a record monthly level of $2.4 billion in February of this year. Money managers such as Putnam and Janus laid off staff and dramatically cut costs as revenues plummeted with the assets.
"It has been extremely tough," says H. Bruce McEver, founder and president of Berkshire Capital Corp., an investment bank that specializes in the asset management industry. "The fall in the U.S. market has taken a toll on asset bases and the net value of those assets."
One result: M&A activity is slowing. During the first half of 2001, announced money management deals worldwide totaled $8 billion, only about half the amount during the same period of 2000, according to data from Berkshire Capital. Last year the values of money management deals set a record, with the median multiple on 2000 transactions reaching 13 times earnings before interest, taxes, depreciation and amortization, compared with 11 times ebitda in 1999.
Multiples reached a high of 30 times ebitda, the premium that UniCredito Italiano paid for Pioneer Group when it acquired the Boston-based firm for $1.3 billion. This deal was one of more than 40 cross-border transactions in 2000.
While the deal making is less frenetic, a healthy number of small transactions continue to close. A recent case in point: Mellon Financial announced in late April that it will buy Standish, Ayer & Wood. Liberty Financial Cos., which produced one of the most outrageous multiples when it bought Wanger Asset Management last year for $450 million, roughly 5 percent of assets under management, has itself agreed to be purchased by FleetBoston Financial Corp. Meanwhile, Zurich Financial Services Group is said to be shopping Scudder around. Merrill Lynch may soon unload Hotchkis and Wiley. And the big wirehouse may also make a big-ticket purchase, perhaps picking up BlackRock.
"There has been some pressure on pricing, and deals are taking longer to get done, but there are just as many deals in the pipeline as ever before," says Donald Putnam, CEO of Putnam Lovell Securities in New York. "The structural imperatives are there; it's just a different texture than it was a decade ago. Ten years ago the drive was for scale. Now it's all about being in every market with a broad array of products. The industry learned in the drive for scale that size doesn't guarantee success. The same can be said of the strategy that tries to be all things to all people. It has to be done thoughtfully. Few firms are going to be successful at both manufacturing and distributing."
The retail, high-net-worth and institutional segments are attracting many new players who may have previously focused on only one of those segments. Fidelity recently unveiled a new separate-account program for the affluent, while firms like Janus Capital Corp. and MFS Investment Management, best known for retail mutual funds, are landing scores of institutional subadvisory accounts, as well as separate-account wrap-platform assignments.
"The industry is as competitive as it's ever been," says Berkshire's McEver.
For the first time since 1997, the rankings show a greater concentration of assets among the largest firms. At the end of 2000, the top ten money management companies ranked by Institutional Investor accounted for 32 percent of the $18.7 trillion in third-party client assets controlled by the top 300 firms. That was up from 26.5 percent at year-end 1999. Growth of total assets managed by the top 300 was flat in 2000, compared with 1999's 22 percent increase over the year before.
Tenth-ranked Citigroup has perhaps the most extensive global reach of any player, but its homegrown, research-driven asset management group in Stamford, Connecticut, has been slow to garner much in the way of new assets. As a whole, however, Citi did see assets increase $31 billion in 2000, most of the gains coming from inflows into Smith Barney and Salomon Brothers brand mutual funds and individual managed accounts.
Northern Trust Co., which garners the No. 15 spot, has Fidelity-size ambitions. "We think we can do both manufacturing and distribution," says Orie Dudley Jr., chief investment officer.
Perhaps. But it certainly won't be easy.
