Activist investor Nelson Peltz's fund has turned its sights to State Street Corp., publicly calling for the trust bank to become more profitable and consider a spinoff or sale of its investment management division.
Mr. Peltz's fund, Trian Fund Management LP, said the bank has focused on expansion and increasing revenue, at the expense of profitability and returning capital to shareholders, according to a letter being sent to the State Street board on Sunday evening along with an earlier paper outlining Trian's suggestions for the bank.
"Despite being a leader in an attractive industry, [State Street] has generated negative shareholder returns," wrote Trian, which now owns about 3.3% of State Street, up from a 1.2% stake. "It has become clear that State Street is not willing, to date, to publicly commit to the actions we view as necessary to enhance long-term shareholder value."
Trian's move comes as State Street, along with its rival, Bank of New York Mellon Corp., has been sued by states for allegedly overcharging pension funds for foreign exchange trading services. The bank has denied the allegations and has said it was releasing more details on pricing.
State Street is one of the country's largest trust banks, acting as a custodian for investment firms' securities and handling other back-office chores. It also has a major investment management arm, State Street Global Advisors, whose clients include pension funds, nonprofit organizations and corporations. That division is in the booming business of so-called exchange-traded funds, which trade on exchanges like stocks.
Trian is pushing the bank to consider selling or spinning off State Street Global Advisors, saying such a move would unlock value. Asset managers usually have higher valuations than custody banks, it says. The investor cited BlackRock Inc.'s purchase of Barclays Global Investors in 2009 as an example of what could happen to an independent State Street Global Advisors.
State Street, which has a market capitalization of about $17 billion, competes with Bank of New York Mellon, BlackRock, Northern Trust Corp. and others. Its stock is down with financials this year, about 27%, which is worse than the broader market but better than the share performance of Bank of New York Mellon and Northern Trust. It is scheduled to report quarterly results Tuesday.
Responding to Trian's concerns, State Street said, "Over the past year, members of State Street's senior management have met with representatives of Trian on a number of occasions and have engaged in constructive discussions about our business. Despite the challenging operating environment over the past several years, our business has remained resilient.
"State Street has continued our track record of profitable growth and has maintained the strongest capital position among our closest peers. With the approval of the Federal Reserve and within the context of growing our business, we intend to continue to return capital to our shareholders."
"The main question is why is this move by Trian the exception versus the norm among bank shareholders, especially among trust banks," CLSA analyst Mike Mayo said in a research note.
