Why banks should sell their fund managers
Barclays’ proposed sale of BGI may be an eye-catching deal thanks to its size, but it is unlikely to be the last bank that gets out of the fund management business.
Banks have debated whether they need to control their asset management arms for years. In the United States, Citigroup and Merrill Lynch were early sellers of their divisions in 2005 and 2006.
Those moves were prompted by growing concerns among regulators that banks might sell clients their own, inferior, funds. Instead, banks were encouraged to offer customers a range of funds from a variety of different managers in a structure dubbed “open architecture”.
Today, banks are selling their asset managers because they need the cash. There are few buyers for regular banking assets at anything other than fire-sale prices. But because asset managers are not heavy users of capital, most of the proceeds of a sale flow straight through to the capital ratio.
That explains why Lloyds is considering selling part of the Insight Investment arm that it acquired with HBOS and why Santander tried (unsuccessfully) to exit from its fund management arm last year.
Even without the capital pressures that banks are under at the moment, there are sound reasons why banks should not own asset management businesses.
Many banks and insurers acquired asset managers during the early 1990s. Management consultants touted the idea, arguing that banks were full of hot leads who could be cross-sold a multitude of high-margin products, from insurance to structured notes.
However, many of these mooted synergies have failed to materialise. Meanwhile, many banks have been left with sub-scale fund managers that deliver less-than-striking performance figures.
Bank executives have also pointed to the diversification benefits of owning asset managers, whose fee-based earnings would be more stable than banks’ highly-cyclical core profits, or losses.
But those earnings have proven to be more volatile than they hoped, as fund management revenues dived along with the stock market. Moreover, given the lowly rating assigned by investors to asset managers within banks, shareholders would be better off owning them independently.
There are also strong arguments for believing that asset managers do a better job when they are independent, rather than owned by a banking behemoth.
Banks do have a valuable asset in their millions of customers, brand recognition and high street presence. However, they can best exploit that by earning commission from independent asset managers rather than trying to do the job themselves.