Wise words on asset management sell-offs
News | Knowledge Seeker | June 7, 2009 at 2:56 pmTechnorati Profile
In 1995, I was chief executive of the investment management group John Govett when it was sold to Allied Irish Banks. AIB was in excellent company in buying an asset management business, inspired by the blue bloods of the consulting profession such as BCG and McKinsey. A booming asset manager was a “must have” for dynamic bank boards in Europe, and insurers too joined the buying spree.
As with fashions in banking, the decline of enthusiasm gathered pace over a number of years. European banks gradually retreated, and took a more cautious approach, buying to acquire capabilities.
In the US, partly due to regulatory pressure, both Citibank (2005) and Merrill Lynch (2006) disposed of a large part of their asset management companies to quoted independents, respectively Legg Mason and BlackRock.
Today the bloom is very much off the rose. Barclays’ proposed sale of iShares, its ETF subsidiary held within Barclays Global Investors, is the clearest indication yet that banks no longer consider asset management a core activity.
The “must have” has made a journey to “nice to have” to “let’s hang on to it if we can” to “what’s it worth to a buyer?”.
But are banks wise to have weakened their commitment to their asset management businesses? It is worth remembering why they were so keen to buy them in the first place.
First, they serve the same retail client base, even if in one instance as a principal and in the other as an agent. Second, the banking and insurance brands carry high retail recognition, in contrast to most independent asset managers. Third, asset management earnings are viewed as relatively stable, or at least less correlated with the banking cycle. Fourth, they are more highly valued by the stock markets, reflecting the lower capital requirement and the higher returns on equity employed. Finally, at the commodity end of the asset management sector, economies of scale are substantial and consolidating buyers can identify impressive earnings gains. In some areas there has been success. Where the product is essentially a commodity such as the provision of index management, many of the favourable arguments have come into full play. There are also clear successes where the acquired business had strong third party clients.
But success is conditional – the acquisition must not disturb client relations, fiduciary culture and the focus on performance that lie at the heart of a successful asset management business.
There have been significant underperformers among banks and insurers. The optimism that saw asset management as an easy strategic move in the 1990s has been tempered by the recognition that it is a different kind of business. Changing regulation of investment services is also putting pressure on European banks.
In one sense the development of guided/ open architecture (where banks sell funds from a range of external fund managers) is an argument to dispose of the manufacturing capability in asset management, and thus to maximise client choice. Conversely, the guidance is important in serving a retail client base and no bank can easily promote products and services on which it has not done due diligence.
Indeed, investment product development is likely to play an important role within a bank even if it has sold its pure asset management businesses. Add to this commercial logic. Distribution fees earned by banks from providing investment product to their client base are usually much in excess of the fees charged by the asset manager. Investment product distribution is a business most banks would regard as core to activities.
We may conclude pure asset management is a non-core activity for banks, but there is no simple path to decide how to configure the investment services that banks need and want to provide. The genuinely independent parts of the asset management businesses can be disposed of, and for reasons of capital ratios and commitment of risk capital this may make sense. But the absolute sums involved are seldom sufficiently large, so banks in the main will have higher priorities as they seek to rebuild their balance sheets. Sadly for the bankers, the best time to sell an asset management business is when you don’t have to.
Kevin Pakenham is managing director financial institutions group, Jefferies International
Source Financial Times
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Tags: asset, Management
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