Morgan Stanley Shares Rise After Ubben’s Fund Discloses 2% Stake

  • ValueAct Capital says it purchased 38 million shares
  • Shares of bank rise the most on S&P 500 Financials Index

Morgan Stanley rose the most among top U.S. banks after activist Jeff Ubben’s ValueAct Capital Management disclosed a 2 percent stake, attracted by the investment bank’s shift toward fee-based businesses.

Shares of the company, which dropped 6.8 percent this year through Monday, climbed 2.2 percent to $30.32 at 10:05 a.m. in New York, reaching a seven-month high. The 92-company S&P 500 Financials Index declined 0.3 percent.

ValueAct, which manages more than $16 billion, bought 38 million shares of the bank, the San Francisco-based fund company said in a regulatory filing Monday that shows stock acquired as of June 30.

Morgan Stanley is an attractive investment because of its shift to asset-light, fee-based businesses such as wealth and investment management, as well as investment-bank advisory, according to a ValueAct letter to investors that was seen by Bloomberg. Those businesses now account for 80 percent of profit, up from 30 percent before the financial crisis, it said in the letter, which also praised the bank’s moves to reduce lending risks and recapitalize “to withstand the most severe economic shocks.”

Gorman’s Shift

ValueAct dismissed some investors’ focus on the bank’s quarterly trading and lending performance as “missing the forest for the trees,” and said Morgan Stanley Chief Executive Officer James Gorman has shifted to “growing fee streams that do not require much equity capital to grow.”

ValueAct acquired Morgan Stanley at about 10 times its price-earnings ratio and 0.7 times book value, which it believes is “an extraordinary discount,” according to the letter. It will “look forward to developing our relationship with management to work towards a long, successful investment.”

The fund’s investment in Morgan Stanley “keeps the pressure on management” to work on expenses and continue shrinking the fixed-income business, Glenn Schorr, an analyst at Evercore ISI, said in a note Tuesday. Schorr said he doesn’t see much an activist could accomplish at Morgan Stanley given regulatory oversight and the firm’s dependence on markets.

Activist investors have, for the most part, shied away from taking significant stakes in big U.S. banks, which have large market valuations and need regulatory permission to increase dividends and buybacks. While Morgan Stanley is the smallest of the six biggest U.S. banks by assets and market value, it’s still worth about $58 billion.

“As with any investor, we welcome ValueAct as a shareholder,” Wesley McDade, a Morgan Stanley spokesman, said.

The banking industry’s weak stock performance this year has led to increased calls for activists to intervene. In January, Mike Mayo, an analyst at CLSA Ltd., raised Bank of America Corp. to a buy because he said the company’s low valuation and “lousy” efficiency increased the chance that an activist shareholder would demand a spinoff or other type of restructuring.

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