Wells Fargo & Co. could be the next to shake up the active asset management world.
The San Francisco-based lender has started to explore selling its asset management business, according to a recent report from Reuters that cited people familiar with the matter. Two of the sources told Reuters that the division could end up being sold for more than $3 billion, though it is not certain Wells Fargo will exit the business. If pursued, the sale would mark the most significant casualty of CEO Charles Scharf's sweeping strategic review of the storied but scandal-ridden bank.
"Asset management has become a scale business," Keefe Bruyette & Woods analyst Brian Kleinhanzl said in an interview. "And Wells Fargo doesn't really have scale."
Tucked inside of its larger wealth and investment management unit, Wells Fargo's asset management business only accounts for about 3% of its revenues, Kleinhanzl estimates. The business unit's assets under management, a key figure among investment managers, jumped 21% year over year in the third quarter to $607 billion. But Wells Fargo's asset management AUM within that total has still largely stagnated around that level for some time now, according to S&P Global Market Intelligence data.
Scharf, the bank's chief executive who took over in late 2019, suggested on an Oct. 14 earnings call with analysts that a sale of some noncore businesses is on the table.
"We're going to continue to exit some things which aren't core to the U.S. banking franchise," Scharf said. And while Wells Fargo is still operating an asset cap that has been mandated by U.S. banking regulators, Scharf said any divestitures would be the result of a business not being central to Wells Fargo's core customer base, not the asset cap. A spokesperson for Wells Fargo declined to comment on the matter.
The world's second-most fragmented industry
Compressed fees, escalating regulatory and technology costs and investors continuing to funnel gobs of money into passively managed investment products like exchange-traded funds have led many active asset managers to weigh their futures. OppenheimerFunds Inc. opted to sell to an investment manager with a broader product set, Invesco Ltd., in 2018. Franklin Resources Inc., meanwhile, joined forces with rival active manager Legg Mason, Inc. in February, a scale grab that brought its AUM above $1.5 trillion.
Invesco CEO Martin Flanagan recently said M&A was not a "focus at the moment" for the Atlanta-based asset manager but did not rule out deals altogether. Activist investor Trian Fund Management LP recently took on a 9.9% stake in Invesco and fellow asset manager Janus Henderson Group PLC, while emphasizing the opportunity for consolidation in the space. Executives at Franklin, which does business as Franklin Templeton, more directly said they are considering more M&A.
"We are absolutely in the flow of what's going on," Franklin CFO Matthew Nicholls said on the company's Oct. 27 earnings call. "We are one of the companies that is quite actively pursuing ideas in the industry and making sure we keep up with the flow of change."
Morgan Stanley was behind the latest active asset management deal with its $6.5 billion purchase of Boston-based Eaton Vance Corp., which has consistently gathered customer inflows, unlike many of its peers. Once the deal closes, Morgan Stanley expects to have more than $1 trillion in AUM, putting it in a new class of investment managers alongside indexing giants including BlackRock Inc. and active stalwarts like PIMCO.
Like Morgan Stanley, other big banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. have expressed interest in doing additional deals in the asset and wealth management businesses. KBW's Kleinhanzl even named Goldman Sachs as a potential buyer for Wells Fargo's business in his Oct. 26 note.
Asset managers make up the second-most fragmented industry in the world, according to an Oct. 25 note from Morgan Stanley analysts. As a result, the sector is ripe for deals with many buyers putting a premium on obtaining scale or expanding their product suites into growth areas like private markets, environmental, social and governance investing and the fixed-income markets.
In the report, the Morgan Stanley analysts wrote that among the U.S. financial institutions that have excess capital at the ready and may have an interest in M&A are Baltimore-based T. Rowe Price Group, Inc., Kansas' Waddell & Reed Financial Inc., JPMorgan, Goldman Sachs, State Street Corp. and Bank of New York Mellon Corp. The asset managers that have "in-demand niche product and/or distribution capabilities," according to the analysts, are BrightSphere Investment Group Inc., Virtus Investment Partners Inc., WisdomTree Investments Inc., Ashmore Group PLC and Man Group Ltd.
"The onset of COVID-19 led to a market downturn and investor exodus from both active and passive funds in March, but subsequent central bank actions fueled a strong rebound, and flows stabilized," the Morgan Stanley analysts wrote. "However, we expect the implications of the crisis to have a lasting impact on the industry, accelerate existing trends, and motivate managers to take strategic decisions faster than anticipated."