DWS Sale

Hitting Escape Velocity from Deutsche Bank

Selling DWS will be easier than making money in fund management.
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Photographer: Alex Kraus/Bloomberg

Deutsche Bank AG is, at last, preparing to give its asset management operation a measure of independence. But DWS will struggle to achieve escape velocity from its former parent.

Monday's announcement that the bank will move ahead with Chief Executive Officer John Cryan's year-old plan to sell shares in DWS is welcome -- if he can carry it off. Deutsche Bank tried and failed to sell a chunk of the business back in 2012. Any resumption of the stock-market wobbles that wiped 5 percent off the Stoxx Europe 600 Index in a week could undermine demand for the planned stock sale.

Cryan hopes that letting the unit loose will accelerate its growth potential, boosting the dividends that will flow back to its majority owner. As my Gadfly colleague Lionel Laurent noted earlier this month, asset management has been far and away the most profitable of Deutsche Bank's businesses.

Back of the Pack

Deutsche Bank is the worst-performing stock in the 47-member Stoxx Europe 600 index of banks

Source: Bloomberg

Note: Returns calculated to closing prices on Feb. 23

A separate listing should enable DWS to fund growth-boosting acquisitions by selling additional shares. That's been the successful strategy Amundi SA followed since Credit Agricole SA and Societe Generale SA took the money manager public a decade ago. That gave it the flexibility to become Europe's biggest asset manager, with 1.4 trillion euros ($1.7 trillion) of assets.

But DWS is being set free into an increasingly competitive field. Standard Life Aberdeen Plc announced the sale of its insurance business last week to focus solely on asset management. HSBC Holdings Plc's incoming Chief Executive Officer John Flint said last week he's exploring options for his bank's $462 billion asset-management unit.

The problem is the growth of low-cost passive investment products, which have drained money from active management and put pressure on margins. In response, European fund managers are trying to achieve economies of scale by bulking up.

With 700 billion euros ($860 billion) of assets, DWS ranks in the top five fund managers in Europe. But it's a relatively small player on the global stage, dwarfed by the likes of BlackRock Inc. with $6.3 trillion and Vanguard Group Inc. with $4.7 trillion.

With 115 billion euros of exchange-traded funds, DWS says it's the second-biggest ETF provider in Europe. That should give it a platform to take advantage of the wave of money flowing into low-cost passive products, which shows no signs of abating.

But DWS's hopes to keep its management fee margin at more than 30 basis points looks hopeful if the relentless pressure on fees seen both in Europe and the U.S. in recent years is any guide.

Amundi seems to have finally achieved escape velocity. Its 3.5 billion-euro purchase of Pioneer Investments last year propelled it into the global top ten of fund managers. DWS will need to find a similarly transformative deal to gain membership of the $1 trillion club and get a seat at the global table.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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