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Deutsche Asset Management’s staff and client base are said to be buckling under the pressure of a five-year period of upheaval at the investment house, which has been put on the chopping block by the German bank.
Staff morale and client loyalty have been tested since the German lender first decided to carry out a strategic review of the investment division in 2011. And the news two weeks ago that the bank is again considering offloading parts of the asset management business has compounded worries.
The partial spin-off of the fund business comes as the bank awaits a settlement agreement with the US Department of Justice over allegations of mis-selling of mortgage-backed securities. John Cryan, the chief executive of Deutsche Bank, said last month that the investment division “will remain an essential part” of the bank’s business model.
The DoJ initially requested $14bn for the settlement agreement. This far outstrips the €5.5bn Deutsche has put aside to cover litigation costs, dealing a blow to the bank and its shareholders. The bank’s share price has fallen 52 per cent over the past 12 months.
The asset management division, which oversees €719bn of assets, has suffered $7.2bn of redemptions from its mutual funds so far this year, largely reversing the $8.1bn of inflows it attracted in 2015, according to Morningstar, the data provider.
Chris Wheeler, analyst at Atlantic Equities, the brokerage, says: “Deutsche AM seems to be having issues. Asset management is all about confidence. When you see that the parent company is all over the place, it is very hard to attract money.”
“Morale is not great,” adds a former senior Deutsche AM employee who left the company earlier this year. He says that a big part of the problem for staff is their lack of conviction in the parent company.
“A lot of people are angry [with how the division has been run]. Fund managers do not have a lot of Deutsche stock in their portfolios. They don’t like the company’s governance structure,” he says.
Just two of the 111 actively managed equity funds sold under the Deutsche brand in Europe have exposure to the parent company, according to Morningstar.
For Deutsche AM’s staff and clients, the news of the potential flotation carries a sense of déjà vu.
The 2011 review led the Frankfurt-based lender to attempt to sell large chunks of the asset management business. Deutsche Bank eventually backtracked on those plans after a potential deal with Guggenheim Partners, the US investment firm, fell apart in 2012.
Deutsche subsequently merged the asset management division with the bank’s wealth unit, bringing the two together under the leadership of Michele Faissola. The former investment banker is one of four executives to have led the asset management division in as many years.
Mr Faissola’s departure from Deutsche Asset & Wealth Management last year — which came on the back of another strategic overhaul of the bank — led to another reversal: the separation of the asset and wealth management divisions just three years after they had been brought together.
With morale flagging, there has also been a steady stream of high-profile departures from the asset management division over the past 12 months.
Barbara Claus, a Frankfurt-based analyst at Morningstar, says: “The investment teams were fairly stable in the past. Recently, more fund managers have left. This could be to do with overall problems at the group. When you talk to the [fund managers], they say the outlook is quite bleak for Deutsche.”
Among the departures from Deutsche AM’s investment teams this year are Owen Fitzpatrick, US head of equities; Joe Benevento, US chief investment officer; Dodd Kittsley, US head of exchange traded product strategy; Nils Ernst, equity fund manager; and Chris Price, director of insurance asset management.
This month it also emerged that Henning Gebhardt, the group’s prominent head of equities, will leave by 2017, while renowned convertible bond managers Marc-Alexander Kniess and Stefan Schauer have left to join Lupus Alpha, the German boutique.
A spokesperson for Deutsche AM says the division’s attrition rate is “very low”, at 2 per cent over the past four years in Europe, the Middle East, Africa and Asia. He adds: “We have continued to make strategic hires in 2016 as we develop our business, with 153 full-time equivalents joining up to July.”
Nonetheless a fund manager at a Swiss investment company, speaking on condition of anonymity, says the departures are a concern for Deutsche’s shareholders. “Obviously it is a people business, and when people leave, the assets go with them. Earnings are tied to it being a stable place for people to work. I would not be tempted to work there,” he says.
The fund manager adds: “The bigger concern is the general franchise, especially now they have lost a lot of very good people. People working there must be quite unsettled. That is what concerns me.
“We have looked at [Deutsche] to see whether there is an angle [to buy the stock at the current share price], as it is very cheap, [but] there are a lot of issues and a lot of risks. The question is whether it is a value trap and the value continues to erode, or whether it is a screaming buy. You need a hell of a lot of conviction to come up with that call. I think things will get worse.”
Several senior business executives have also left the asset management division after Mr Faissola’s departure.
This includes Steffen Leipold, head of retail distribution in Germany and Austria; Barbara Rupf Bee, European distribution head; Mick McLaughlin, US head of ETF distribution; and James Dilworth, head of Deutsche Asset & Wealth Management Germany.
Quintin Price, who was brought in from BlackRock, the world’s largest asset manager, to replace Mr Faissola, left after just a few months in charge of Deutsche AM due to ill health.
Despite the problems facing the asset management division, many investment experts are supportive of a full or partial spin-off of the unit.
Mr Wheeler points out that Deutsche Asset Management made 28.5 per cent in return on tangible equity in the first half of 2016, compared with 0.9 per cent for the group.
Fall in Deutsche Bank’s share price over the past 12 months
“You don’t want to sell your jewel, but that is what you do if you have to. The best thing [Deutsche Bank] has is the asset management business. It is one of the few assets that is sellable,” he says.
Morningstar’s Stephen Ellis, one of the few analysts to have a buy rating on Deutsche Bank, adds: “An asset management IPO is a good idea. [This] could raise €2bn-€3bn of capital. That would potentially be quite valuable for [Deutsche Bank].
“The [asset management] business, as profitable as it is, does not contribute a meaningful proportion to the overall revenues of the business. This is an opportunity to raise capital, without necessarily giving up a significant proportion of profits.”
Deutsche AM return on tangible equity in the first half of 2016
Others express caution about Deutsche giving up any part of a business that generates stable revenues for the group and reduces its reliance on investment banking.
Jon Peace, an analyst at Credit Suisse, the Swiss bank, moved to an underperform rating on Deutsche in September. He says: “An IPO of the asset management division would help reduce the size of any additional equity placement or rights issue, although it would reduce earnings and concentrate the business mix more on capital markets.
“The asset management division only accounts for around 15 per cent of earnings expectations at Deutsche Bank, but it is the most profitable business and a useful source of earnings diversity.”
Peter Szopo, chief equity strategist at Vienna-based Erste Asset Management, agrees: “A partial float of Deutsche’s asset management arm would be a defensible step to help solve the bank’s capital issue. However, it is obvious that the bank’s long-term appeal would suffer.”