BNY Mellon seeks alternatives and Asia M&A
The chairman of BNY Mellon Asset Management discusses the firmÆs goals and post-financial crisis opportunities.
Jonathan Little is the London-based chairman of BNY Mellon Asset Management, responsible for the firmÆs business outside North America. He recently treated AsianInvestor to breakfast at his office to talk about how the asset-management business is changing.
BNY Mellon Asset Management is still a relative newcomer to international asset management.
Little: Our roots are as a US mutual fund company, but our business has been international for the past seven years, including in Asia. Ten years ago, Mellon had $300 million of assets sourced from non-US clients. But through both organic growth and strategic acquisitions, such as Newton Investments, we now manage $350 billion for non-US clients, accounting for over 50% of our net flows.
How much of that is from Asia?
Our Asia business has been a step behind that of Europe. WeÆve had a presence in Hong Kong since 1998, but Europe was our first priority, particularly with the Newton business. We got serious about Japan in 2004, which began a real business in the region. Today we generate around $250 million of revenue from Asia, not just from selling our Dublin- or Jersey-listed funds to retail investors or the odd Japanese institution. We now cater to sovereign wealth funds, high-net-worth channels, retail, sub-advisory clients and pension funds.
What distinguishes your Asia-Pacific clients?
Institutional investors worldwide have a drive for alpha, and thatÆs particularly true of institutions in Asia ex-Japan. European clients want balanced funds, but many investors in Asia went straight to specialisation.
Is LDI going to matter to Asian investors?
Yes, in that Asian clients are also looking to separate alpha and beta, and the principles of beta investing are similar to what drives European pension funds to adopt liability-driven investing. But for Asian investors, there is more demand for higher-alpha components û which implies higher fees. We manage both alpha and beta portfolios, but this business doesnÆt work so well if youÆre stuck in the middle, generating just 100 basis points of alpha and getting paid 30bps for it.
To what extent is your business in this difficult middle ground?
All players, bar niche boutiques, are in the middle to some extent. TheyÆll talk to you about their best products, but some of their assets will be stuck in the middle û and those are usually the traditional products that pay the bills. ItÆs tough if youÆre an integrated fund manager, anywhere from $100 billion to $1 trillion of AUM, with a single investment process. ThatÆs the kind of manager thatÆs going to be really stuck in the middle, and itÆs hard to change the mindset. WeÆre fortunate in that we run a multi-boutique business model, and we donÆt have the constraint of having to run every strategy according to the same investment philosophy.
Will the funds industry reinvent itself?
Some players can, others wonÆt be able to. The better hedge-fund firms will become mainstream asset managers. There are a number of these with $20-40 billion of assets that want to do more. They want access to new clients, and they want institutional service skills. IÆd expect to see more M&A. WeÆre always on the lookout to acquire boutiques, and they welcome us because they can benefit from our service platform. A good example is Walter Scott in Edinburgh. This is a very alpha-focused, research-driven equities manager, with low portfolio turnover. It held zero financial stocks going into 2007. We bought it about two years ago and retained nearly 100% of the staff and the clientele, because nothing changed for them. TheyÆre still running their business the same way.
What about in Asia?
Our Asia business still needs some filling in. We have Asia product but we need to be more local. For example, we manage our Japan products from London and Boston. We have a 20% stake in Hammon Investments in Hong Kong, which is great. But we realise the need to have our own business there, either a majority- or wholly owned presence. Acquisitions come out of our capital base, not our P&L, so weÆre able to move quickly. But itÆs hard to find the right opportunity at the right price. Firms in Hong Kong are expensive, while in Japan, there isnÆt enough of an entrepreneurial culture, so there arenÆt many independent firms there to buy.
Have you looked at other markets?
WeÆve considered one company in Korea. It has a good, if small business. WeÆre already running Brazilian equities for Korean investors thanks to a Brazil-based boutique we acquired. Overall IÆm optimistic about our business prospects, and given the current market turmoil, Asian investors will like the idea of dealing with a very solid bank such as BNY Mellon.
Speaking of which, whatÆs the impact of the credit crisis?
ItÆs an opportunity for us, and for others. WeÆre not a flash investment bank going cap in hand to sovereign wealth funds, looking to be recapitalised. It has not gone unnoticed by our clients that our name hasnÆt been in the press.
What is the relationship between your business development and your custody operations?
A significant portion of our AUM is sourced from clients that are also custody clients. Custody and asset management go well together. We sweep a lot of custody clientsÆ cash into our cash funds, and we attract a lot of passive-investment business from them. We do some cross-selling of our other products, but not as much as we could. BNY Mellon has $23.5 trillion of assets under custody versus $1.1 trillion of assets under management, so you can see the potential reach of this relationship.
Any products of particular interest?
Any absolute-return product is our focus: long/short or unconstrained long-only equities. WeÆre also now very active in the ænew balancedÆ space, involving multi-asset and multi-strategy portfolios run against a customised benchmark. It works by the client giving us a risk budget and return target, and letting us determine the best way to reach those objectives. Benchmarks are typically to beat Libor or inflation by a certain amount, as opposed to traditional market-cap ones.
Sounds like the old TAA.
It is a lot like tactical asset management, which we also do. TAA is more about asset allocation; ænew balancedÆ is more about the underlying alpha engines. We can use TAA on top and hedge it out via an internal mandate, where we believe the portfolio manager will outperform.
This is all part of the ongoing desire among investors to separate alpha and beta. An investor has a limited tolerance for fees. So it can put 20% of its assets into cheap beta products, and pay fewer managers to do a better job of it. Then it can engage in some interesting asset classes. WeÆre interested in new asset classes including infrastructure and private equity.
Can a traditional asset manager easily break into an area like private equity?
This is a business where change is coming. Fees are very high, the manager gets paid at every stage of a transaction, unlike traditional institutional money management, where the fees are always being ground down. Private equity will institutionalise, and thatÆs our chance.
A shakeout is coming. There arenÆt many deals left involving badly managed companies that have been lazy with their balance sheets. Private equity therefore often came down to simply obtaining cheap leverage, or just a lot of leverage. That model wasnÆt producing great returns, and now itÆs over. A lot of these funds then strayed beyond their mandates and ended up taking stakes in listed US financial companies. These deals havenÆt worked out either, and besides, itÆs not what investors expected, paying private-equity fees for a portfolio of listed companies that are losing money. So private-equity players are going to fall, and the ones that canÆt institutionalise on their own may want us as a partner.
BNY Mellon Asset Management is still a relative newcomer to international asset management.
Little: Our roots are as a US mutual fund company, but our business has been international for the past seven years, including in Asia. Ten years ago, Mellon had $300 million of assets sourced from non-US clients. But through both organic growth and strategic acquisitions, such as Newton Investments, we now manage $350 billion for non-US clients, accounting for over 50% of our net flows.
How much of that is from Asia?
Our Asia business has been a step behind that of Europe. WeÆve had a presence in Hong Kong since 1998, but Europe was our first priority, particularly with the Newton business. We got serious about Japan in 2004, which began a real business in the region. Today we generate around $250 million of revenue from Asia, not just from selling our Dublin- or Jersey-listed funds to retail investors or the odd Japanese institution. We now cater to sovereign wealth funds, high-net-worth channels, retail, sub-advisory clients and pension funds.
What distinguishes your Asia-Pacific clients?
Institutional investors worldwide have a drive for alpha, and thatÆs particularly true of institutions in Asia ex-Japan. European clients want balanced funds, but many investors in Asia went straight to specialisation.
Is LDI going to matter to Asian investors?
Yes, in that Asian clients are also looking to separate alpha and beta, and the principles of beta investing are similar to what drives European pension funds to adopt liability-driven investing. But for Asian investors, there is more demand for higher-alpha components û which implies higher fees. We manage both alpha and beta portfolios, but this business doesnÆt work so well if youÆre stuck in the middle, generating just 100 basis points of alpha and getting paid 30bps for it.
To what extent is your business in this difficult middle ground?
All players, bar niche boutiques, are in the middle to some extent. TheyÆll talk to you about their best products, but some of their assets will be stuck in the middle û and those are usually the traditional products that pay the bills. ItÆs tough if youÆre an integrated fund manager, anywhere from $100 billion to $1 trillion of AUM, with a single investment process. ThatÆs the kind of manager thatÆs going to be really stuck in the middle, and itÆs hard to change the mindset. WeÆre fortunate in that we run a multi-boutique business model, and we donÆt have the constraint of having to run every strategy according to the same investment philosophy.
Will the funds industry reinvent itself?
Some players can, others wonÆt be able to. The better hedge-fund firms will become mainstream asset managers. There are a number of these with $20-40 billion of assets that want to do more. They want access to new clients, and they want institutional service skills. IÆd expect to see more M&A. WeÆre always on the lookout to acquire boutiques, and they welcome us because they can benefit from our service platform. A good example is Walter Scott in Edinburgh. This is a very alpha-focused, research-driven equities manager, with low portfolio turnover. It held zero financial stocks going into 2007. We bought it about two years ago and retained nearly 100% of the staff and the clientele, because nothing changed for them. TheyÆre still running their business the same way.
What about in Asia?
Our Asia business still needs some filling in. We have Asia product but we need to be more local. For example, we manage our Japan products from London and Boston. We have a 20% stake in Hammon Investments in Hong Kong, which is great. But we realise the need to have our own business there, either a majority- or wholly owned presence. Acquisitions come out of our capital base, not our P&L, so weÆre able to move quickly. But itÆs hard to find the right opportunity at the right price. Firms in Hong Kong are expensive, while in Japan, there isnÆt enough of an entrepreneurial culture, so there arenÆt many independent firms there to buy.
Have you looked at other markets?
WeÆve considered one company in Korea. It has a good, if small business. WeÆre already running Brazilian equities for Korean investors thanks to a Brazil-based boutique we acquired. Overall IÆm optimistic about our business prospects, and given the current market turmoil, Asian investors will like the idea of dealing with a very solid bank such as BNY Mellon.
Speaking of which, whatÆs the impact of the credit crisis?
ItÆs an opportunity for us, and for others. WeÆre not a flash investment bank going cap in hand to sovereign wealth funds, looking to be recapitalised. It has not gone unnoticed by our clients that our name hasnÆt been in the press.
What is the relationship between your business development and your custody operations?
A significant portion of our AUM is sourced from clients that are also custody clients. Custody and asset management go well together. We sweep a lot of custody clientsÆ cash into our cash funds, and we attract a lot of passive-investment business from them. We do some cross-selling of our other products, but not as much as we could. BNY Mellon has $23.5 trillion of assets under custody versus $1.1 trillion of assets under management, so you can see the potential reach of this relationship.
Any products of particular interest?
Any absolute-return product is our focus: long/short or unconstrained long-only equities. WeÆre also now very active in the ænew balancedÆ space, involving multi-asset and multi-strategy portfolios run against a customised benchmark. It works by the client giving us a risk budget and return target, and letting us determine the best way to reach those objectives. Benchmarks are typically to beat Libor or inflation by a certain amount, as opposed to traditional market-cap ones.
Sounds like the old TAA.
It is a lot like tactical asset management, which we also do. TAA is more about asset allocation; ænew balancedÆ is more about the underlying alpha engines. We can use TAA on top and hedge it out via an internal mandate, where we believe the portfolio manager will outperform.
This is all part of the ongoing desire among investors to separate alpha and beta. An investor has a limited tolerance for fees. So it can put 20% of its assets into cheap beta products, and pay fewer managers to do a better job of it. Then it can engage in some interesting asset classes. WeÆre interested in new asset classes including infrastructure and private equity.
Can a traditional asset manager easily break into an area like private equity?
This is a business where change is coming. Fees are very high, the manager gets paid at every stage of a transaction, unlike traditional institutional money management, where the fees are always being ground down. Private equity will institutionalise, and thatÆs our chance.
A shakeout is coming. There arenÆt many deals left involving badly managed companies that have been lazy with their balance sheets. Private equity therefore often came down to simply obtaining cheap leverage, or just a lot of leverage. That model wasnÆt producing great returns, and now itÆs over. A lot of these funds then strayed beyond their mandates and ended up taking stakes in listed US financial companies. These deals havenÆt worked out either, and besides, itÆs not what investors expected, paying private-equity fees for a portfolio of listed companies that are losing money. So private-equity players are going to fall, and the ones that canÆt institutionalise on their own may want us as a partner.
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