Financial services companies have spent huge amounts of time and money assembling massive asset management operations. Now they're taking a second look to see how the pieces fit together.
By Rich Blake
July 2002
Institutional Investor Magazine
For the better part of the past decade, major banks, brokerages and insurers jostled and jockeyed to build up their asset management business. They made acquisitions, forged global alliances, pushed for organic growth. And no wonder: Even amid last year's dreary equity markets, the industry still boasts a reliably steady revenue stream and a solid pretax profit margin of 29 percent (though that's down from 37 percent a year ago). The biggest financial services firms mostly succeeded. Today's leading money managers bear names like Merrill Lynch Investment Managers, J.P. Morgan Fleming Asset Management, Morgan Stanley Investment Management and UBS Global Asset Management. These firms' appetite for growth was so voracious their acquisitions set off an industrywide
consolidation. Now many of these bulked-up firms are conducting their own postmortems on the growth binge.
Money managers are coming to grips with the fact that it may be relatively easy for a deep-pocketed company to build an asset management empire - but it's not so easy to run one. There's no simple formula to make all the parts work together. Some acquisitive firms opt for integration, melding once-independent shops into one global behemoth, as Merrill Lynch has done. Others allow their money management divisions to operate autonomously. A few have tried both.
"Firms can be integrated if it's inherently conducive to do so," says UBS Global Asset Management CEO for the Americas Brian Storms. "But you also don't want to try to put a square peg into a round hole."
"A lot of the big players are realizing the hard way that you can't take a bunch of asset management businesses and just cram them together," says Christopher Acito of Casey, Quirk & Acito, a Darien, Connecticut,based consulting firm. "After a decade of mergers and acquisitions, we are going to see a lot of asset managers being spun back out of large financial services companies in the next few years."
For the moment, the industry is in fairly good health, considering that U.S. equities have posted back-to-back years of declines. Assets of America's 300 largest money managers fell just 0.53 percent, from $18.7 trillion in 2000 to $18.6 trillion at the end of 2001. Just five years ago the largest 300 managers controlled $10.6 trillion. All told, this year's II 300 collected somewhere around $100 billion in revenues, earning profits of roughly $29 billion. That's almost three times as much as the top 300 earned in 1996.
Most of the biggest participants would say these numbers speak for themselves: The rapid buildup in the 1990s strengthened their positions in an attractive market. Perhaps, but signs of stress have begun to appear, with some financial services companies spinning off their asset management groups. Some of these asset managers have faltered, while others simply have not fit into the strategic plans of their owners.
In April 2001 financially strapped Zurich Financial Services decided it didn't have the wherewithal to fix its troubled Scudder, Stevens & Clark division. Deutsche Bank bought the group for $2.5 billion. And last summer Merrill Lynch sold off the former Hotchkis and Wiley, a top-performing boutique, a mere four years after acquiring it from its founders. The small shop never found a place in the Merrill empire, especially after the brokerage paid $5.3 billion for U.K.-based Mercury Asset Management and merged the various units into Merrill Lynch Investment Managers. Under Merrill's watch, assets at the Los Angeles,based Hotchkis unit remained flat at $10 billion.
Industry observers expect U.K. bank Barclays, frustrated with the low-margin indexing business, to sell off passive manager Barclays Global Investors, which ranks third at $769 billion. Though a management buyout had once seemed likely, Mellon Financial Corp. was recently seen as a suitor.
After buying fixed-income specialists Miller Anderson & Sherrerd for $350 million in 1996, Morgan Stanley kept its hands off the business. Then in 2000 Morgan Stanley opted to merge Miller Anderson and its three other money management units into one group. At least a dozen investment staff members and several marketers have left since the end of 2000, with many of the departures coming from the West Conshohocken, Pennsylvania, offices of the former Miller Anderson. (Lockup contracts began to expire last year.)
There is one constant in money management. As it has for the past ten years, Fidelity Investments, which has eschewed acquisitions, claims the top spot in our annual ranking. The privately-held Boston-based firm finished 2001 with $854 billion, down from $886 billion at the end of 2000 and $916 billion at the end of 1999. For a brief period early in 2000, Fidelity crossed the $1 trillion mark, but those days have gone the way of Nasdaq 5,000.
"In a difficult market, growing assets under management comes down to being diversified," explains Robert Reynolds, Fidelity's chief operating officer. "As a firm we are blessed with three major lines of distribution, direct retail, institutional and intermediaries. Very few firms have that type of scope."
Deploying its own three-pronged distribution strategy is New York,based Axa Financial, which dropped one spot to No. 9 in this year's ranking. Of its $481 billion in assets, some $455 billion belong to Alliance Capital Management, which includes Sanford C. Bernstein & Co., the respected value manager. "We aren't just in every channel - we are getting positive flows in every channel," boasts Christopher (Kip) Condron, Axa's president and CEO. State Street Global Advisors, with year-end assets of $785 billion, moves up from No. 3 last year to take second place away from BGI. Beyond that, there was little change among the top ten firms.
Where will growth come from in a soggy stock market?
"The fastest way to grow is through acquisition - that's why so many deals get done. But at some point you need organic growth," says Kurt Cerulli, founder and principal of Boston-based Cerulli Associates, which provides strategic consulting to money managers.
In a study of money management deals closed between 1998 and 2000, Cerulli Associates found that 32 percent of the acquired firms registered above-average growth before the deal closed and below-average growth afterward. Put another way, one third of the deals end up slowing asset growth, as some of the biggest buyers are now discovering. Says Guy Moszkowski, an asset management analyst at Citigroup/Salomon Smith Barney, "Increasing assets is going to be more challenging." No doubt, though, the biggest money managers will keep trying.
- Rich Blake
The rankings were compiled by Senior Associate Editor Tucker Ewing and Assistant Editor Erika Ihara.