May 18 (Bloomberg) -- BlackRock Inc. and Bank of New York Mellon Corp. are competing to become the world’s biggest money manager as stock markets show signs of recovery.

Each company is in talks to buy Barclays Plc’s fund unit, whose $1.5 trillion in client assets ranks highest in the industry, people familiar with the matter said last week. Each covets Barclays Global Investors’ exchanged-traded funds, quantitative index investments and securities-lending business, analysts said.

“This will change the landscape, whether Bank of New York or BlackRock gets it,” said Geoff Bobroff, president of Bobroff Consulting Inc., an East Greenwich, Rhode Island, firm that advises mutual-fund companies.

BGI, based in San Francisco, would vault BlackRock, the largest publicly traded money manager in the U.S., to $2.81 trillion in assets. BNY Mellon, the world’s biggest custody bank, would rise to $2.38 trillion, surpassing firms including Fidelity Investments and Vanguard Group Inc. The New York-based companies would gain more customers outside of the U.S. and put pressure on their main rivals -- Pacific Investment Management Co. for BlackRock, and State Street Corp. for BNY Mellon -- to catch up.

‘Relative Strength’

Bob Doll, BlackRock’s vice chairman and chief investment officer for global equities, declined to comment on reports that his company is in talks to buy BGI. He expects the fund- management industry to consolidate because many companies are losing money or breaking even, he said, which presents an opportunity for BlackRock to grow its business.

“In a position of relative strength, for which we’re thankful, we’re having lots of conversations and getting educated,” Doll said to reporters in Singapore today.

Kevin Heine, a spokesman for BNY Mellon, declined to comment.

Barclays, the U.K.’s third-largest bank, is entertaining offers for BGI as the MSCI World Index, a benchmark for global stock markets, has gained 34 percent since hitting a 6 1/2-year low on March 9. A transaction would supersede its agreement announced last month to sell BGI’s IShares unit to CVC Capital Partners Ltd. for $4.4 billion.

Barclays, under a “go-shop” clause of its deal with London-based CVC, has until June 18 to solicit better offers for IShares and other BGI businesses. The bank’s capital adequacy ratios lag behind those of British rivals Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, which accepted state control in return for taxpayer funds. Other bidders may emerge.

‘Expressions of Interest’

“Barclays has received a number of expressions of interest, including unsolicited interest in the broader BGI business,” the London-based bank said in a May 15 statement. “There can be no certainty that any of these approaches will result in a different transaction.”

BGI’s pretax profit fell 19 percent to $595 million last year as financial markets plunged. BlackRock, co-founded by Chairman and Chief Executive Officer Laurence Fink, reported pretax profit of $1.02 billion in 2008. Pretax profit at BNY Mellon’s asset-management unit was $234 million.

Simon Willis, an analyst at NCB Group in London, values BGI at more than $10 billion. The biggest acquisition in the fund industry was BlackRock’s $8.5 billion takeover of Merrill Lynch & Co.’s investment-management business in 2006. BNY Mellon, created by the 2007 merger of Bank of New York and Mellon Financial, has a market value of $33.1 billion, compared with $18.4 billion for BlackRock.

Quant Pioneer

Barclays Global pioneered index funds and quantitative, or quant, investing beginning in the 1970s. Quant funds use mathematical models to make investment decisions. BNY Mellon’s asset-management unit, which includes Dreyfus funds, is more focused on traditional stock and bond picking, making the acquisition complementary, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.

IShares had $262 billion in U.S.-based exchange-traded funds as of April 30, the most in the industry. ETFs, which typically track the performance of indexes such as the Standard & Poor’s 500, were one of the fastest-growing segments of the investment industry in the past five years.

“ETFs are seen as a business that is going to continue to grow a lot faster than the overall fund industry,” Burton Greenwald, an independent mutual-fund consultant in Philadelphia, said in an interview.

ETF Growth

U.S. ETFs attracted $178 billion in net inflows in 2008, according to IndexUniverse.com, a Web site that tracks the data. Stock and bond mutual funds lost $234 billion in outflows during the same period, according to the Investment Company Institute, a Washington-based trade group. Unlike mutual funds, whose shares are priced once a day, ETFs are listed on an exchange and traded throughout the day like stocks.

“For Bank of New York Mellon, getting the quant business and IShares, that would be an absolute home run,” Cassidy said.

BNY Mellon competes against State Street in the custody business, where the Boston-based company ranks third after JPMorgan Chase & Co., and in funds. State Street is the second- largest ETF manager, with $134 billion in U.S. assets, and the world’s biggest money manager for institutions.

Bobroff, the Rhode Island consultant, said BGI’s index funds and ETFs would also be big suppliers to BNY Mellon’s securities-lending business. Index funds and ETFs are good sources of securities because they have more stable portfolios than actively managed mutual funds. A securities lender allows investors to borrow stocks and bonds, using the collateral to invest.

Countering Pimco

ETFs also make BGI attractive to BlackRock. The company’s biggest rival in managing fixed-income assets is Pimco, the Newport Beach, California-based firm co-founded by Bill Gross, which is in the early stage of building a roster of ETFs.

“BlackRock would need to think about how to compete, so what better way to do that than to buy the largest player in the industry?” Bobroff said.

Buying BGI fits into Fink’s goals of expanding BlackRock’s products and its presence outside the U.S., Robert Lee, an analyst with Keefe Bruyette & Woods Inc. in New York, said in an interview.

While BGI wouldn’t help the firm develop the company’s retail mutual-fund distribution, a stated aim for Fink, it would build BlackRock’s global reach. The firm is Europe’s biggest hedge-fund manager, the largest independent manager of pension- fund assets in Canada and Japan’s largest discretionary investment manager, according to BGI. The company is active in 50 countries.

Wider Reach

“To the extent they want to provide a full boat of products and solutions and be more global, this would help,” Lee said.

BlackRock was also among firms that made preliminary offers to buy Bank of America Corp.’s Columbia mutual-fund unit, people familiar with the matter said earlier this month. Columbia oversees more than $341 billion, including more than $186 billion in money-market funds.

Bank of America may raise $10 billion through the sales of Columbia, its First Republic private bank in California and other holdings, Chief Executive Officer Kenneth Lewis said on May 7.

Bank of America, based in Charlotte, North Carolina, owns 47 percent of BlackRock, a stake it inherited when the bank bought Merrill Lynch & Co. in January.

Top Asset Managers Worldwide - Dec. 31, 2008

Barclays Global Investors   $1.5 trillion
State Street Corp.          $1.44 trillion
BlackRock Inc.              $1.31 trillion
Fidelity Investments        $1.25 trillion
J.P. Morgan Asset Mgmt.     $1.1 trillion
Vanguard Group              $1.0 trillion
BNY Mellon                  $881 billion
Capital Research & Mgmt.    $839 billion

Source: Company reports

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

Last Updated: May 18, 2009 12:02 EDT