LAST MONTH'S REMOVAL of Tom Hughes from the post of global head of asset management at Deutsche Asset Management caps a dreadful year for a business once regarded as a top player in the large and lucrative UK fund management market. Poor performance has led to an outflow of funds and loss of clients. The firm is now overhauling senior management and refining its entire business model in an attempt to overcome these setbacks.
In doing so, DeAM must face up to the familiar challenges besetting all its large rivals: how to attract, retain and motivate within a large organization individuals capable of producing high performance in the increasingly specialized mandates that clients now demand. Specialist boutiques are eating away at the large fund managers' business, increasing competition and reducing margins. DeAM has been late to respond to these challenges. If it cannot make a success of its latest revamp, Deutsche Bank might begin to wonder whether UK institutional asset management is a good business to continue in.
"Deutsche Bank chairman Josef Ackermann's track record shows that he is willing to sell of parts of the business," says a former insider. Last year Deutsche sold off its private equity portfolio, DB Capital Partners, to its management, and sold its global passive business to Northern Trust. "It is certainly not out of the question that Ackermann would sell off the institutional business in the UK, and just keep the retail business," says the former insider. "The retail business [rebranded DWS] might not be a huge profit generator, but it is not struggling like the institutional business."
For now, the UK institutional market is a lucrative one to be in, with an estimated €1.9 trillion in pension fund assets alone making it the largest in Europe, over twice the size of the second largest, the Netherlands. And for DeAM, which contributes 5% in profit to the group, and 13% in turnover, the UK institutional market is an important one. DeAM had more than €85 billion in institutional money under management in the UK at the end of June – €26 billion more than in Germany, and around 15% of DeAM's institutional assets under management worldwide.
The price of delay
With the acquisition of Morgan Grenfell in 1989, DeAM became one of the big five managers in the UK of the 1990s. It has since built up a franchise that, it says, makes it the country's second largest manager of institutional money [behind Barclays Global Investors].
But poor performance in equities, outflows in the balanced business and a recent blood-letting among senior management show that it is paying the price for having rested on its laurels for too long.
Early this year, DeAM announced that it would be making changes that will bring the business closer to the new demands being made by UK institutions. How it implements these will be crucial to success.
Over the first two quarters of 2004, institutional investors withdrew £3 billion ($5.4 billion) from DeAM funds. Inflows amounted to just £1 billion. At the end of the second quarter, institutional money under management at DeAM in the UK was €85 billion, down from €94 billion at the end of the same period in 2002.
In large part outflows have been a direct result of DeAM's poor performance. In Russell/Mellon's CAPS UK pooled pension fund performance universe, only two of DeAM's 20 funds that have been running for a minimum of five years appear in the top quartile – the Japanese small caps fund and the property fund. Fifteen funds appear in the third and fourth quartiles.
Performance is better in segregated institutional funds on a long-term basis, says DeAM, but mainly in fixed income and currency.
Seemingly as a result, since April this year DeAM has parted with European chief investment officer Karl Sternberg, European chief financial officer Ian Goodwin, head of UK equities John Wood, head of European equities Sandy Black, and managing director of performance and client services Peter Ellis.
The announcement at the end of last month that Tom Hughes, global head of asset management, was leaving the fund management arm "to attend urgent family business" has raised further questions about where Ackermann is taking the asset management business. Amid a complete executive board reshuffle, Ackermann has replaced Hughes with former head of global equities at Deutsche Bank Kevin Parker, who is known for his tough talking, and now there is an atmosphere of panic at DeAM.
"In the three days before the formal announcement of Hughes' replacement with Parker, I received more calls from DeAM staff than I can remember," says a senior executive recruitment consultant in London. "I don't think anyone is too sure about what is going on or whether they want to be a part of it. I think some people are concerned that it won't be long before a 'for sale' signs hangs above DeAM's door in the UK."
The consultant points to the appointment of Paul Manduca, European chief executive at DeAM, at the end of 2002. Manduca joined from Rothschild Asset Management (now Insight Investments) where he orchestrated the sale of the business to UK banking group HBOS. At DeAM, he reports to Parker, and, in turn, oversees Paul Berriman, chief executive officer of DeAM UK.
Berriman is quick to quash rumours about a Deutsche withdrawal in the UK. "The UK is an essential part of DeAM's global strategy. The UK institutional investment market is the largest in Europe – no fund management firm could afford not to have an operation in the UK," he says. "Also DeAM's global research and investment platforms' structure, where analysts and portfolio managers research and stock-pick on the ground in their own market place, means it is vital that the UK operation flourishes. Without it, understanding and access to major UK companies would simply not be there."
But with shifts in the appetite of UK institutional investors making it harder to gain market share, it seems reasonable to ask whether this is a market that Deutsche Bank, or any other large bank, would want to be in. The lure of stable annuity earnings that attracted large banks into asset management in the first place now seems to have led them down a false trail. Earnings are as volatile and market-dependent as in any other financial sector and with clients focusing on absolute return and open architecture in asset management, the competitive advantage seems to be passing from large firms to small ones.