Banks discover money management again as trading profit declines
Global banks, forced by regulators to reduce their dependence on profits from high-risk trading, have rediscovered the appeal of the mundane business of managing money for clients.
Deutsche Bank AG is now counting on the fund unit it failed to sell to help boost return on equity, a measure of profitability. UBS AG is paring investment banking as it focuses on overseeing assets for wealthy clients. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo & Co., three of the five biggest U.S. banks, are considering expanding asset- management divisions as they seek to grab market share from fund companies such as Fidelity Investments.
"Asset management is a terrific business," said Ralph Schlosstein, chief executive officer of Evercore Partners Inc., a New York-based boutique investment bank that last month agreed to buy wealth manager Mt. Eden Investment Advisors LLC. "Asset managers earn fees consistently without risking capital. Compare that to other businesses in the financial services."
Banks will need to overcome the perception that they sometimes push their own funds and improve their middle-of-the- pack performance as money managers if they want to attract assets from investors. Goldman Sachs's stock and bond mutual funds have trailed about 61 percent of their respective peers on average over the five years ended Sept. 30, and about 52 percent over the past three years, according to data from Morningstar Inc. in Chicago. JPMorgan's mutual funds have been beaten by 42 percent of rivals over the past five years, while Wells Fargo's have lagged behind 44 percent, the Morningstar data show.
Even if banks attract new clients, a renewed focus on asset management may not mitigate the full impact of Basel III capital requirements that will cut into profits firms made from leveraged trading. It probably won't make up for revenue lost to the pending Volcker rule, which curbs lenders receiving federal support from trading for their own accounts.
Still, money management has advantages. It doesn't require a lot of capital, and the investment risks are borne by clients. Unlike businesses such as trading, where results can be volatile, funds produce steady fees based on assets under management. The Standard & Poor's index of asset managers and custody banks has a return on equity of 13.1 percent.
That compares with an average return on equity of 8.3 percent for the 24 firms in the KBW Bank Index, half of what it was in 2006 before the onset of the credit crisis, according to data compiled by Bloomberg.
"It's not hard to see the appeal of asset management," Neel Kashkari, a former Goldman Sachs investment banker who now heads global equities at Pacific Investment Management Co., said in an interview. "But some banks have struggled in the business because of a short-term view."
As recently as 2000, brokers, banks and insurers dominated the rankings of global asset-management firms, accounting for six of the top 10 spots based on assets, according to data from trade publication Pensions & Investments. Today, they hold four of those positions as the balance shifted to BlackRock Inc., Vanguard Group Inc. and Fidelity. The four banks and insurance companies on the list collectively have about $5.5 trillion in assets compared with more than $11 trillion for the rest.
The decline reflects a combination of poor performance, the rise of mutual-fund sales through fee-only independent advisers rather than bank-owned brokerages and the impact of a mutual- fund trading scandal uncovered by then-New York Attorney General Eliot Spitzer in 2003. The inquiries into improper trading led to increased regulation, raised operating costs and resulted in more than $4 billion in penalties to firms including Bank of America Corp., Merrill Lynch & Co. and Citigroup Inc.