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Most Likely to Succeed | Leadership in the Fund Industry

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Robert Pozen and Theresa Hamacher
November 17, 2011

Published in: Economy & Finance
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Most Likely to Succeed | Leadership in the Fund Industry

  1. 1. Most Likely to Succeed: Leadership in the Fund Industry Robert Pozen Senior Lecturer, Harvard Business School Senior Fellow, Brookings Institution Theresa Hamacher, CFA President, NICSA November 17, 2011
  2. 2. 2 What Leads to Success in the Fund Industry? 1. Dedication to asset management 2. Private ownership/control of firm
  3. 3. Agenda • The evidence ─ Market share trends ─ M&A trends • The limits of the financial supermarket • The example of the Big Three • The public–private model 3
  4. 4. Largest Fund Complexes: 2010 4 Rank Fund Complex Market Share 1 Vanguard 12.1% 2 Fidelity 11.3 3 American Funds (Capital Group) 9.4 4 PIMCO 3.7 5 JPMorgan Chase 3.5 6 Franklin Templeton 3.2 7 BlackRock 3.0 8 Federated 2.4 9 T. Rowe Price 2.4 10 BNY Mellon 2.3 Dedicated asset managers highlighted. Source: Investment Company Institute
  5. 5. Top 25 Fund Complexes 5 Source: Investment Company Institute 1990 2000 2010 Dedicated asset managers Market share 39.8% 43.2% 55.3% Number of firms 13 11 14 Total top 25 market share 76.2% 71.0% 73.6%
  6. 6. Herfindahl–Hirschman Index (HHI) 6 HHI Concentration Level Below 1,000 Unconcentrated 1,000–1,800 Moderate Above 1,800 High HHI for mutual fund industry (Dec. 2010): 465 Source: Investment Company Institute, 2011 Investment Company Factbook
  7. 7. Top 10 Fund Complexes Rank 1990 2000 2010 1 Fidelity Fidelity Vanguard 2 Merrill Lynch Vanguard Fidelity 3 IDS/Shearson American Funds American Funds 4 Dreyfus Putnam Funds PIMCO 5 Vanguard Morgan Stanley JPMorgan Chase 6 Franklin Janus Franklin Templeton 7 Federated Invesco BlackRock 8 Dean Witter Merrill Lynch Federated 9 Kemper Franklin Templeton T. Rowe Price 10 American Funds Smith Barney/Citi BNY Mellon 7 Firms new to the top 10 in 2000 and 2010 are highlighted. Source: Investment Company Institute
  8. 8. Life Cycle of an Asset Manager • Lots of new entrants ─ Low barriers to entry ─ Niche fund products ─ Other companies market and service • Many new entrants close shop or stay small over the next decade • Successful firms get to tipping point ─ Develop full product line ─ Own marketing/servicing ─ Enter retirement space • Or choose to be acquired 8
  9. 9. U.S. Fund Sponsor M&A ($ billions) 9 Deals with a publicly disclosed value of $50 million or greater. Data for 2000–2010 are for all asset managers, not just fund sponsors. Sources: Merrill Lynch; Thomson Reuters information provided by Goldman Sachs.
  10. 10. Deal Valuations 10 Deals with a publicly disclosed value of $50 million or greater. Data are for all asset managers, not just fund sponsors. Source: Thomson Reuters information provided by Goldman Sachs.
  11. 11. Diversified Firms as Buyers 1993–2001 • Banks and insurers acquire asset managers ─ Mellon/Dreyfus ─ Higher growth of earnings ─ Diversification of income • European firms particularly active ─ Deutsche Bank/Zurich Scudder ─ Seeking global diversification ─ Most did not achieve major U.S. presence ─ Though there were exceptions: Invesco 11
  12. 12. Diversified Firms as Buyers 1993–2001 • Brokerage firms expand proprietary fund families ─ Morgan Stanley acquires Van Kampen and MAS ─ Lehman/Neuberger ─ American Express/Threadneedle • U.S. asset managers buy high-net-worth managers ─ Franklin/Fiduciary Trust, Alliance/Sanford Bernstein ─ Leverage investment skills ─ Add customized services ─ Invesco’s acquisition of AIM is an exception 12
  13. 13. Dedicated Firms as Buyers 2002–2006 • BlackRock and Legg Mason key buyers ─ BlackRock buys State Street Research, Quellos, and Merrill Lynch unit ─ Legg Mason bought Private Capital, Permal, and Salomon Smith Barney unit • Focus on distribution by Merrill Lynch and Smith Barney, not on fund management ─ Clients want choice of best funds ─ Regulatory scrutiny of conflicts 13
  14. 14. Dedicated Firms as Buyers 2002–2006 • Leveraged buyouts of asset managers with help of private equity firms ─ Nuveen ─ Marsico • Conditions were very favorable ─ Good cash flow from managers ─ Interest rates still low ─ Flexible loan conditions 14
  15. 15. Credit Crisis–Driven Divestitures 2007–2010 • Insurers in trouble sold asset managers ─ Marsh McLennan sold Putnam to Great West of Canada ─ AIG sold asset management arms to Bridge Partners ─ Lincoln National Life sold Delaware Management to Macquarie (Australia) • Brokers in trouble also sold asset management units ─ Lehman sold Neuberger Berman ─ Morgan Stanley sold Van Kampen to Invesco 15
  16. 16. Credit Crisis–Driven Divestitures 2007–2010 • In U.S. and U.K., Treasury put heavy pressure on large banks to accept federal capital along with restrictions on dividends and executive compensation ─ To help redeem federal capital, Bank of America sold Columbia Management to Ameriprise ─ To help avoid taking government capital, Barclays sold BGI, its asset management business, to BlackRock 16
  17. 17. Top 10: Dedicated vs. Diversified 2010 Rank Dedicated 1 Vanguard 2 Fidelity 3 American Funds 4 PIMCO 6 Franklin Templeton 7 BlackRock 8 Federated 9 T. Rowe Price 17 Highlighted firms have a strong money market fund base. Source: Investment Company Institute 2010 Rank Diversified 5 JPMorgan Chase 10 BNY Mellon
  18. 18. Limitations of the Financial Supermarket • Open architecture ─ Client demand ─ Regulatory scrutiny • Challenges of cross-selling ─ Divergent customer bases ─ Training demands • Retention of investment professionals ─ Culture ─ Compensation • Volatility of investment performance ─ Difficult for public firms 18
  19. 19. The Big Three 19 Rank 1990 2000 2010 1 Fidelity Fidelity Vanguard 2 Vanguard Fidelity 3 American Funds American Funds 5 Vanguard 10 American Funds Combined share 18.7% 25.1% 32.8% Source: Investment Company Institute
  20. 20. The Example of the Big Three • Organization ─ Non-hierarchical ─ Informal voice in key issues • Compensation ─ Partners get stake in asset management business ─ Executives comfortable with PM compensation • Privately held ─ No public reporting ─ Continuity of ownership (vs. generational transfers) 20
  21. 21. The Public–Private Hybrid • Various forms ─ Dual share class: Federated ─ Concentrated ownership: Franklin Templeton, BlackRock, T. Rowe Price • Advantages ─ Valuation of stock options ─ Currency for acquisitions ─ Controlled by management ─ Long-term, investor culture 21
  22. 22. Top 10: Private and Hybrid 2010 Rank Private 1 Vanguard 2 Fidelity 3 American Funds 22 2010 Rank Public–Private Hybrid 6 Franklin Templeton 7 BlackRock 8 Federated 9 T. Rowe Price
  23. 23. Role Reversal 1990–2000 From outsiders. . . Diversified financial firms Banks Insurers Brokers 23 2010 . . . to insiders Dedicated asset managers Majority of top 25 complexes With majority of fund assets
  24. 24. 24 www.nicsa.org/thefundindustry

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