Banks looking to sell off their asset management arms could provide opportunities for buy-side firms to bolster their operations in 2009, according to Richard Phillipson, a principal at investment management consultancy Investit.
At the end of 2008, banking group Credit Suisse agreed to sell parts of its Global Investors business to Aberdeen Asset Management. Further consolidation in the sector has followed, with the recent decision by French banks Société Générale and Crédit Agricole to merge their asset management units, as well as Henderson’s planned purchase of New Star.
Phillipson suggests more banks could follow Credit Suisse’s lead as they attempt to plug holes in their balance sheets or hone their focus on their core banking business. As the global financial crisis bites harder, some banks are discovering that their asset management arms are no longer the safe, reliable source of revenue they once were.
“Banks originally wanted asset management operations because they felt they had the distribution channels to sell asset management services and they believed it made more sense to sell something created in-house,” says Phillipson. “They also thought it was a relatively less volatile stream of income than their investment banking business.”
Now, however, banks face pressure to offer clients a choice of asset management services. Banks may once have had direct relationships with clients’ finance directors, but in recent years investment consultants have increasingly become key intermediaries. These consultants are not always willing to recommend banks’ asset management offerings, not least because the transactional nature of banking is not necessarily seen as a good fit with the longer-term, relationship-based fund management business.
“Some consultants also take the view that banks could make cuts at their fund management arms whenever the bank needed to reduce spend, regardless of the needs of the asset management business or its clients.” says Phillipson. The recent volatile markets, which have caused asset managers’ portfolio valuations, and thus their revenues, to plummet, have made asset management divisions even less attractive to certain banks.
The most likely buyers of banks’ unwanted investment units are pure asset management groups, according to Phillipson. “You can see the likes of Aberdeen, Schroders, Invesco and Henderson thinking that it is quite a good time to be buying funds under management and the capabilities that go with them,” he says.
Hedge funds may also be among the buyers. Just as asset managers have sought to adopt hedge-fund-like traits and strategies in recent years, hedge funds may now want to appear more traditional given the recent bad press they have received in relation to short-selling and the Madoff scandal. Hedge funds may also have to diversify because some of their traditional strategies are less viable in the current market conditions. “Shorting is not always possible in the current environment and fewer banks willing to provide leverage for hedge fund trading strategies,” says Phillipson.
While asset managers may be able to pick up bargains from banks looking for a quick sale in 2009, the benefits could be strictly long term. “They will have modest expectations for what new money may be garnered from their purchases in the near future,” says Phillipson. “In the long term, savings rates are forecast to pick up, but individuals will pay down debt before buying the pension that they thought their house represented.”
Phillipson also thinks the Henderson-New Star deal will not be the last among pure asset managers. “Building fund management platforms that can be shared by a number of boutiques is a sensible way of amortising the cost of the platform,” he says. But Phillipson adds a note of caution: “Fund managers don’t always get the cost benefits that they hope for.”