Wells Fargo & Co. will double its $444 billion asset-management unit within seven years by expanding in international markets as wounded European rivals retrench, according to division chief Mike Niedermeyer.
The firm will add foreign stock and bond strategies to its U.S.-based mutual-fund unit, open six more Luxembourg-based funds for offshore clients and wrest business from competitors, Niedermeyer said in an interview. The San Francisco-based bank, the biggest U.S. home lender and owner of the nation’s largest branch network, also seeks to buy a business that would give clients greater access to handpicked hedge funds, he said.
Chief Executive Officer John Stumpf, 58, is plowing resources into businesses such as asset management as new global bank regulations and record-low interest rates crimp profit. Morgan Stanley and Bank of America Corp. sold U.S. mutual-fund units in the past three years, and Deutsche Bank AG has sought buyers for a division focused on the Americas.
“We’re at a tipping point for the industry,” Andrew Karolyi, a finance professor at Cornell University’s Johnson Graduate School of Management, said in an interview. “You have seen some banks saying they want to double down while you have others saying we want out. Asset management, as a business, is as tough as it’s ever been.”
Asset management serves institutional clients such as pensions and endowments, sovereign-wealth funds and corporations. It’s separate from the bank’s wealth-management unit, which houses Wells Fargo’s retail brokerage and manages funds for individuals. Managers are outlining the unit’s goals today as part of the bank’s Investor Day presentation, and the stock rose as much as 3.3 percent in New York.
Wells Fargo, with JPMorgan Chase & Co., is among the last of the major U.S. banks to own a mutual-fund business, managing about $215 billion in money-market and mutual funds under the Wells Fargo Advantage Funds name, Niedermeyer said. The business, run by Karla Rabusch, was bolstered by Wells Fargo’s 2008 purchase of Wachovia Corp. and its Evergreen Investment Management Co. unit, which added $67 billion in assets.
“Having a model and consistent long-term strategy is a key issue,” said Niedermeyer, who joined Wells Fargo 24 years ago. “If we do great work we will grow faster than the industry.”
The Advantage funds attracted or appreciated by about $14 billion in the year ended March 31, making it the 17th-largest fund family, according to Morningstar. The fund had $101 billion in long-term assets at the end of the first quarter, Wells Fargo said. An additional $109 billion was held in money-market funds.
The bank was the world’s 28th-biggest asset manager at the end of 2010, according to research by Pensions & Investments magazine and consultant Towers Watson & Co. JPMorgan ranked ninth and Bank of America was 21st. BlackRock Inc. is the world’s largest, overseeing $3.68 trillion, while Pacific Investment Management Co. holds $258.7 billion in a single pool, Bill Gross’ Total Return Fund.
Wells Fargo, the fourth-biggest bank by assets in the U.S., will have to overcome a perception that bank- and insurance-owned mutual funds are among the most expensive, said Harry Milling, a Morningstar analyst. The company has “found religion” more than others, yet still has work to do, he said.
“When you talk to board members of bank-owned funds you hear they want to be competitive as far as fees,” Milling said. “You don’t hear them wanting to be the lowest in the industry. That’s not their game.”
The Advantage Growth Fund, with about $10 billion in assets, has an expense ratio of 1.31 percent for the primary share class, Milling said, compared with a median of 0.77 percent for similar funds. It has gained 10 percent this year, according to data compiled by Bloomberg.
Most client assets are invested by 36 teams, including 25 at Wells Capital Management, and 11 others that follow less traditional strategies, such as European Credit Management Ltd. and Galliard Capital Management, the unit’s website shows.
Those teams may have more to do as investors return to the stock and bond markets after the financial crisis erased $27.9 trillion from global equity indexes in 2008 and led Bank of America to sell its Columbia Management Group fund business in 2009. Morgan Stanley sold its retail-funds unit to Invesco Ltd. a year later.
Investors moved $109.1 billion into U.S.-based mutual funds this year through March 31, according to the Investment Company Institute. About $6.8 billion was moved into international stock funds while $15.4 billion was withdrawn from U.S. domestic stock funds, ICI said on its website. Bond funds added $94.5 billion.
The move into international markets represents one of Wells Fargo’s “key growth areas,” Niedermeyer said. Eight of the investment teams focus on non-U.S. markets, a shortcoming the bank addressed Dec. 15 when it said it would acquire EverKey Global Partners, which invests in global-equity strategies.
The bank will sell mutual funds in the U.S. through its network of 15,000 advisers assembled through acquisitions, including a $4.5 billion payment to Prudential Financial Inc. in 2009 for the remaining stake in a joint venture. The business includes the former A.G. Edwards & Sons Inc. franchise, “historically one of the largest and most successful distributors of mutual funds,” Burton Greenwald, a consultant, said in an e-mail.
That may be less important than it once was as investors are likely to demand access to products created by other fund providers as well as Well Fargo, Greenwald said. The bank’s funds must outperform the average to get recommendations from its brokers because of perceived conflicts, he said.
“Pushing your own products to retail investors is no longer popular,” said Sophie Schmitt, a senior analyst at Aite Group LLC.
Morningstar assigns four or five stars to 52 percent of the Wells Fargo Advantage funds, compared with about one-third for the industry. More than 65 percent of the assets held in the funds aren’t subject to a load, a charge tacked onto the sale of the fund, according to Morningstar.
Niedermeyer wagers that Wells Fargo can woo institutional clients from European firms grappling with that region’s sovereign-debt crisis. The lender has eight salespeople in Europe and plans to add five more, he said.
Deutsche Bank sought to sell asset-management businesses overseeing almost 400 billion euros ($513 billion) to Guggenheim Partners LLC before talks broke down. The firms may reach a deal for the bank’s real estate and infrastructure unit, the lender said in a May 11 statement, while Dexia SA, the bailed-out Franco-Belgian lender, is selling a unit that manages about 80 billion euros. The uncertainty led some European clients to move money to Wells Fargo last year, Niedermeyer said.
Wells Fargo, which manages only about $2 billion in offshore funds, can challenge firms such as BlackRock and Pimco to be within the top 20 in the next five years, he said. The bank could sell other products, including those that can be pitched to small-and medium-sized college endowments.
Growth may invite scrutiny. Mike Mayo, an analyst at CLSA Ltd., questioned executives on the bank’s earnings call last month about whether investment-banking expansion represents “mission creep” from their core commercial-banking business.
“Wells is quite focused on trying to revive that banking-supermarket approach,” Aite’s Schmitt said. “This is an expansion of that model.”
As recently as the 1990s, brokers, banks and insurance companies dominated the top 20 spots among U.S. mutual fund families, when money funds are included in total assets.
It hasn’t always worked out. Citigroup Inc. is partially dismantling itself after ex-CEO Sanford I. Weill tried to sell savings accounts, insurance and investments in the 1990s. It sold its money-management business to Legg Mason Inc. in 2005.
Banks also were forced to reimburse clients or watch assets dwindle when the performance of funds suffered. Evergreen, when it was owned by Wachovia, saw net outflows of $11 billion in 2008 after subprime mortgage losses forced it to close a bond fund and bail out money-market fund investors.
“It’s certainly possible to have a genuinely valuable asset-management business inside a big bank,” said Loren Fox, a senior analyst at New York-based Strategic Insight, a mutual fund research and consulting firm. “The issue is whether mutual funds are something that will be just another product or whether asset management is a core business that you are committed to building to stand on its own two feet. Wells Fargo is making a big commitment.”