U.S. Banks Overseas Are Turning Their Focus to Money Management

As U.S. banks pick up the pace in overseas expansion, money management has emerged as a high-priority pursuit.

Total assets under management at four major U.S. banks-J.P. Morgan & Co., State Street Boston Corp., Bankers Trust New York Corp. and Chase Manhattan Corp.-surged by 21% last year, to $828 million.

International growth is faster than domestic and getting more attention. State Street, for one, expects its worldwide assets under management will climb to $500 billion from $292 billion over three years, with the non-U.S. portion rising to $250 billion from $60 billion.

The leading asset management banks are opening offices around the globe in an effort to attract assets from both institutions and high-net-worth individuals.

"If you're not involved in managing money outside North America, you're missing two-thirds of the opportunity," said Nicholas Lopardo, chairman of State Street Global Advisors.

Indeed, while State Street and others have developed sizable asset management businesses in the United States, the high-growth economies of Latin America and Asia are seen as offering the greatest growth potential.

Intersec Research Corp., Stamford, Conn., said pension fund assets in non-U.S. markets are expected to grow 70%, to $7 trillion, by 2001, whereas growth in the U.S. is expected to be only 48%.

Much of the overseas growth should be propelled by the privatization of state pension programs, according to a study by J.P. Morgan & Co. In recent years, countries such as Mexico, Argentina, and Chile have privatized their pension systems.

"An increasing emphasis on pension fund management ... will inevitably raise the role of asset managers and financial intermediaries involved in the distribution of public securities," the report said.

And bankers like the fact that they don't have to put too much capital at risk in this business.

"This isn't a business which uses a large amount of capital," said Geoff Lindey, head of U.K. institutional asset mnagement for J.P. Morgan in London. "And when you win a client, you get a fairly steady stream of revenues rather than a single transaction."

As part of the drive to expand internationally, both Bank of Boston and Citicorp earlier this year joined forces with Mexican banks to set up pension fund management companies.

The two banks are also actively developing asset management operations in Brazil, Argentina, and other Latin American countries, though Citicorp declined to answer requests for additional information about its overseas strategy.

J.P. Morgan has set up a joint venture with an Indian investment bank to expand asset management operations in Southeast Asia. State Street recently opened an investment management operation in Hong Kong, bringing its number of such offices outside the United States to six.

To be sure, most U.S. bank money managers still have a long way to go in their efforts to gain exposure to overseas markets. About 8% of Chase's total is invested in non-U.S. securities, while State Street is above 20%.

At Morgan, the figure is closer to 30%; while at Bank of Boston Corp., out a total $32 billion under management, $8 billion is in Argentina and Brazil and $1 billion in offshore investments.

"And when you win a client, you get a fairly steady stream of revenues rather than a single transaction."

Bankers pointed out that international management opportunities are better than domestic.

"Many banks are saying it's too late to make a big splash in asset management in the U.S. but there's still opportunity overseas," said Andre Cappon, president of CBM Group, a consulting firm. "And if you want to become a global player, asset management is very much the new frontier."

"These markets are well developed in the U.S.," said Rick Richardson, managing partner at Price Waterhouse LLP. "They are not well developed in places like Latin America, India, Korea and China."

Analysts are quick to point out that U.S. banks are not the only ones chasing after international portfolios.

Big fund managers in the United States, such as Fidelity Investments, Barclays Global Advisors, and smaller specialized firms such as Templeton; Galbraith & Hansberger Ltd.; and Scudder, Stevens & Clark Inc. are going after the same market.

Overseas, large banks and insurance companies often have a lock on their home countries. In London, for example, Morgan is fighting for market share against long-established competitors such as Mercury Asset Management, Schroders PLC, Philipps & Drew Fund Management, and Deutsche Morgan Grenfell.

"It takes a tremendous amount of time and effort to understand this market and build relationships," said Robert Moritz a partner at Price Waterhouse. "The courtship can be very long."

But U.S. bankers are convinced that their worldwide networks and native expertise work in their favor.

"We have a strong, existing infrastructure combined with local capabilities in 52 countries that permit us to offer U.S. and foreign investment," said Stephen Prostano, managing director of Chase Asset Management. "That gives us an edge."

"You get into this business by doing pension fund management, and U.S. institutions have been doing pension fund management for more than 20 years." said Mr. Cappon. "U.S. institutions are bigger and better at it."

Still, it is by no means certain that they will come out ahead in the global race.

For one thing, analysts noted, U.S. banks are not well known as asset managers since most came into the business fairly recently after missing out on the huge buildup in institutional and retail asset management in the United States. In other words, they still have to build a track record.

"Banks have always been in the money management business but unfortunately never created entities within their organizations and gave them entrepreneurial freedom," said Mr. Lopardo. He was referring to the special compensation and reward systems for asset managers who work best when separate and apart from the parent bank.

Another disadvantage: "Banks are not terribly good at keeping star managers," Mr. Cappon said, because the stars "want millions of dollars and banks have never been good at paying millions of dollars."

Although some banking companies like J.P. Morgan and Bank of Boston are primarily engaged in active management, which aims at picking the best- performing investments and brings in the highest returns, many banks have opted in favor of less profitable, passive investing that seeks to match the market indexes.

As a result, many banks have opted to go after scale rather than returns in a business where margins are already thin and getting thinner.

All this, analysts say, means that even if banks are making progress, they have a long way to go.

"It will take a few years but with everybody rushing in, margins are going to come down," said Mr. Cappon. "Banks will have to learn how to provide value."

It also means banks may have to invest a lot more over the coming years in building expertise, distribution, strategic alliances, or acquisitions.

"You're going to see more banks opening their pocketbooks to get to where they want to be" Mr. Moritz predicted.

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