Should you chance to overhear the CEO of a fund management company bemoaning his or her lot in life, feel free to dispatch a freshly drawn, icily cold bucket of water over that individual. McKinsey & Co’s 2005 asset management survey reveals that the average cost-income ratio in the industry is now 58%, in other words asset managers are operating with margins above 40% on average.
It’s no wonder then that investment banks and broker dealers, where even the very best managed businesses, such as UBS, have margins at the low 30% level, continue to find asset management franchises beguiling. The $18 billion merger of Merrill Lynch Investment Managers and BlackRock has seen the thundering herd increase its bet on fund management, even if some commentators think otherwise. It won’t be the last such deal.
Managing a fund management business after a big acquisition is one time when CEOs really earn their money. M&A in a business where people are the assets is notoriously difficult to get right. Just ask Deutsche Bank. If ever a bulge-bracket bank had a chequered history with acquired asset management businesses it is Deutsche.
Its £975 million ($1.5 billion) purchase of Morgan Grenfell in 1989 provided the platform for its hugely successful global markets business. But it also gave Deutsche a UK asset management business. Morgan Grenfell Asset Management under the leadership of Keith Percy enjoyed a run of success in the mid-1990s but then lost its way, laid low by the sort of headlines that would make a Liberal Democrat leadership contender blush.
In 1996 it suspended star fund manager Peter Young for irregular trading. He later appeared in court at the Old Bailey dressed as a woman and demanding to be called Elizabeth. Then, in 1998, the bee-stung lips of Nicola Horlick emerged from relative obscurity to lead the media on a bizarre odyssey to Frankfurt. She has hardly been out of the newspapers since. Deutsche tried to reinvent its UK franchise but it never really recovered from this period of turmoil. The rump of the old Morgan Grenfell business was sold for £165 million to Aberdeen Asset Management last year.
In the US, the $9.9 billion acquisition of Bankers Trust Company came with a $285 billion-in-assets fund management business that was then the seventh-largest institutional manager in the US. What was left of this once flourishing franchise was sold to Chicago’s Northern Trust Company for $260 million in September 2002. Deutsche said that this largely passive management business was never profitable. But the flourishing businesses of Barclays Global Investors and State Street Global Advisors show how quantitative skills can be parlayed into higher-margin product.
Arguably, Deutsche let these acquired asset management business wither on the vine. The result has not been sumptuous Trockenbeerenauslese wine but value destruction. It is only fair to point out, however, that these two businesses were acquired almost incidentally as parts of bigger deals driven by different strategic priorities. But this does not apply to the $2.5 billion purchase of New York-based Zurich Scudder Investments in 2001.
At the time, the purchase price of 0.9% of assets looked a snip, but Deutsche has so far failed to staunch outflows from Scudder’s funds, which hit $7 billion in 2005. The news of a $100 million rebranding exercise and push into the advisory distribution channel is long overdue. However, what does inspire confidence is the pedigree of the executive overseeing the DWS Scudder retread, Axel Schwarzer. Schwarzer was parachuted into Scudder from Deutsche’s European mutual fund franchise, DWS Investments, last year.
DWS has long been the crown jewels of Deutsche’s asset management businesses and Schwarzer’s history is just as glittering. Across Europe, DWS’s assets have grown from A121 billion in 2002 to A151 billion at the end of last year. Schwarzer has played his part in this success. As head of products, marketing and distribution from 1999 he has dumped multiple European brands and consolidated a pan-European product range. From scratch in 2002 the DWS Invest Sicav range of Luxembourg funds has garnered A9 billion in assets, largely from just the sort of third-party distributors DWS Scudder must now appeal to in the US.
Spending $2.5 million on an advert during the Super Bowl is the easy part. Fixing Scudder will be hard graft. But DWS is a textbook example of how to run an asset management business, and it surely makes sense for Deutsche to draw on its previously neglected homegrown talent pool. It’s about time Deutsche got its assets together – some DWS magic at Scudder might be just what the doctor ordered.
Andrew Capon is editor-in-chief at State Street Global Markets, the research and trading business of State Street Corp. He was formerly senior editor at Institutional Investor and has won numerous awards for journalism on fund management and investment issues.
The views expressed are the author’s own.
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