Euro Banks Cut Their Losses

They're pulling out of money management

In the go-go days of the late '90s, investors poured billions into mutual funds, and European banks and insurers couldn't buy asset-management firms fast enough. Money management was the great growth business of the future, they all believed, something that would supply a stable source of fee income and smooth out volatile earnings from areas such as investment banking. Commerzbank, Zurich Financial Services Group, and many other ambitious European financial houses shelled out an estimated $48 billion to buy more than 100 asset-management companies on both sides of the Atlantic between 1997 and 2001.

Now, many have deep regrets. Down markets have ravaged the performance of most fund managers over the past two years, scaring away customers and squeezing profits. One in five of the newly purchased firms lost money in 2001; many of the rest barely broke even, according to consultants McKinsey & Co. "During the bull market, no one noticed that [many of these deals involved] garbage," says John Duffield, founder and chairman of New Star Asset Management in London. "But the bear market has exposed it all." And it wasn't just the markets that turned against the money managers. The asset-management companies turned out to be far harder to run than most bankers and insurers assumed. Talented investment specialists deserted in droves--often to set up boutiques or hedge funds that now compete with their former employers.

So, many of the banks and insurers that scrambled to get into money management are now scrambling to get out. Zurich Financial sold Zurich Scudder Investments, its $270-billion-in-assets U.S. money-management operation, to Deutsche Bank in April. The Swiss insurer's 1995 acquisition of Chicago-based Kemper Corp. and 1997 purchase of Boston-headquartered Scudder, Stevens & Clark Inc. never lived up to expectations--largely because Zurich merged the two. That might have been a good idea, if it weren't for their radically different cultures and strategies. Irked by the change, many veteran fund managers jumped ship, taking disgruntled institutional and retail customers with them. Almost $10 billion was yanked in 2000 and 2001.

Other European financial companies are quickly following suit. One mergers-and-acquisitions specialist predicts that there will be more than 20 divestments in Europe this year. Commerzbank, which once hoped to turn itself into an international asset- management powerhouse, is seeking buyers for Montgomery Asset Management LLC in the U.S. and Jupiter Asset Management Ltd. in London. Last month, Commerzbank Chief Executive Klaus-Peter Müller announced that the bank was backing away from its international investment-management business and will concentrate on its core market in Germany.

Banks and insurers that aren't selling their fund managers are repositioning them or cutting them back. French bank Caisse des Dépôts et Consignations is pushing its CDC Ixis into the high-fee business of "alternative" investments, such as private-equity and hedge funds. Britain's Schroders PLC is reducing staff after its pretax asset-management profit fell by more than two-thirds last year. A few of the biggest companies--German financial-services giant Allianz, for one--will stay the course with their asset-management acquisitions and continue to sell both their own and others' investment products.

That's because the original premise remains true: As baby boomers age and Europe turns more and more to private retirement accounts, the profits are likely to be rich. Munich-based HypoVereinsbank, for instance, sold Foreign & Colonial, its London-based mutual-funds company, in December, 2000, but continues to earn fees by distributing a wide array of other companies' funds. Indeed, the bank has increased its fund sales by some 10% a month in the past year. "We're seeing the rise of fund supermarkets, where banks increasingly distribute products on behalf of third parties," says Thomas S. Marsh, a senior analyst with Cerulli Associates Inc., a research and consulting firm. "Disenchantment with fund-management acquisitions need not mean disenchantment with fund management."

Well, that's one happy lesson to take away from what has been a sour experience for a host of Europe's financial institutions.

By David Fairlamb in London

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