Date published: 18 January 2020
The competitive challenges faced by the asset management units of the big US banks against the might of BlackRock and Vanguard was underlined this week as US banks unveiled mixed 2019 results for their investment units.
Successful bank-owned asset management divisions generate recurring revenue streams with high profit margins but Wall Street analysts tend not to dwell on these units. Banks generally report minimal details about these operations in spite of their increasingly important contribution to group earnings. And bank chiefs tend to provide brief commentary on their performance during earnings updates in favour of more prominent segments of their businesses.
But Goldman Sachs Asset Management produced higher revenues than its prized investment banking unit for a second year in succession in 2019. The unit provided Goldman with net revenues of close to $9bn, including $2.6bn in fees, and accounted for just under a quarter of the bank’s entire 2019 net revenues.
GSAM attracted net inflows of $123bn, up from $77bn in 2018. However, new business was flattered by the acquisitions of Standard & Poor’s Investment Advisory Services and Rocaton Investment Advisors which together boosted GSAM’s inflows by $84bn. Excluding the uplift from those two deals, GSAM’s net inflow halved last year.
David Solomon, Goldman’s chief executive, wants to build a new competitor to private equity managers, such as Blackstone, which are attracting record inflows from investors. Speaking at the bank’s results presentation this week, Mr Solomon said Goldman’s ability to invest significant capital alongside clients in deals distinguished it from other private equity managers and would help it generate new business.
“Investors like the fact that we partner with them and have ‘skin in the game’. We think we are very well positioned,” said Mr Solomon.
More details about Goldman’s plans will be presented at its investor day on January 29.
JPMorgan Asset Management registered record inflows of $150bn last year, up from a disappointing $20bn in 2018. This growth was not publicised by the top executives at the bank’s results presentation this week. New business growth was driven by inflows into fixed income products and money market funds as investors turned more defensive. However, two of JPMAM’s best selling products were actively managed equity funds while its infrastructure platform attracted $5bn in new business.
“Our inflows are up and the performance of our funds has improved. Ninety-one per cent of our mutual funds are ranked in the first or second quartile over 10 years,” says George Gatch, the head of JPMAM.
However the improvement in investor inflows translated into a muted increase for revenues for JPMAM, which rose 2.2 per cent to $7.06bn.
“What is most important is the returns we provide to clients. Asset management is a long-term business. If we do a good job for our clients over the long term then we will be rewarded,” says Mr Gatch.
He expects to see demand for illiquid alternatives to rise strongly from investors looking for higher returns than those provided by public markets.
As a result, JPMAM is expanding its real estate, infrastructure, fund of hedge funds and private credit capabilities.
“Our latest private credit offering attracted more than $1bn from investors,” he says.
Those illiquid asset classes are less vulnerable to attack from low cost tracker funds. But JPMAM is also aiming to expand its ETF operations, which gathered about $12bn in new cash last year. It launched 35 new ETFs in Europe and plans to expand the product range further.
Expanding its ETF operations thrusts JPMAM directly into the cut-throat price war on fees being led by BlackRock and Vanguard.
Mr Gatch insists that JPMorgan has the firepower to compete effectively against these larger rivals.
“We have over 1,100 investment professionals within JPMAM. I have a great deal of optimism for the future,” he says.
Wells Fargo, the San Francisco bank, provided only limited information about its asset management unit at its 2019 results presentation. WFAM’s assets reached $509bn at the end of 2019, up 9 per cent from the prior year. It stated that the growth was primarily driven from higher market valuations along with net inflows into money market funds. These were partially offset by withdrawals from equity and fixed income strategies.
There is an arms race among asset managers to own the end client and one in three US families banks with Wells Fargo.Nico Marais, Wells Fargo
Nico Marais, who was promoted in June to head of WFAM after Bank of Montreal poached his predecessor Kristi Mitchem to lead its asset management arm, believes that Wells Fargo’s immense reach provides it with a solid foundation to compete with BlackRock and Vanguard.
“There is an arms race among asset managers to own the end client and one in three US families banks with Wells Fargo. We do business with almost every corporate treasurer globally which has helped WFAM’s cash management business to expand significantly. This access to end clients provides significant opportunities for bank-owned asset managers but we recognise that we have to do it better and cheaper than our competitors,” Mr Marais says.
He intends to launch a private loans business “very soon”, drawing on the bank’s extensive network of corporate relationships.
Other objectives include developing a “world class” solutions business that builds customised strategies drawing on the expertise of WFAM’s 29 investment teams.
Expanding WFAM’s work with insurance companies which are desperately looking for new sources of income because of low interest rates is another potential avenue for growth. WFAM is also in the process of building “next generation” asset allocation models that will be used by wealth managers and financial advisers and investing in machine learning to revamp its existing products.
“We know that we have to be agile. I’m quietly confident that we will deliver,” Mr Marais says.
Word count: 970
Link To FT.com: https://www.ft.com/content/eb74053e-e65e-456f-a544-1da1d81139b6
Copyright The Financial Times Limited 2020
© 2020 The Financial Times Ltd. All rights reserved. Please do not copy and paste FT articles and redistribute by email or post to the web.