Fund management should be the jewel in the crown of a financial services group. These are high-margin businesses that are growing strongly and require little capital. But a combination of patchy performance and regulatory issues have dulled the glitter. Morgan Stanley is a case in point, with disappointing outflows that even improved results have failed to stem.
Part of the problem may be structural: rival brokers may not like pitching funds bearing the Morgan Stanley brand and even in-house brokers may be put off by the extra regulatory burden of selling proprietary products. But the remedy need not be dramatic: rebranding would help, especially given Morgan Stanley’s good experience with its Van Kampen branded funds.
A deal, especially the rumoured one with BlackRock, would be a more high-risk way of pepping up asset management. Just reaching acceptable terms looks tough, given the probable gap in valuing BlackRock’s and Morgan Stanley’s assets. BlackRock is riding high right now, as its premium valuation, spike up in performance fees and robust inflows demonstrate.
Even if Morgan Stanley were able to inject its investment management business into BlackRock’s at an exchange ratio acceptable to all, that alone might not lead to a jump up in combined profits. The magic touch in fixed income of Larry Fink, legendary as head of BlackRock, may not extend to the broad equities portfolio that Morgan Stanley carries. And the two cultures may not mesh. The alternative is the long hard slog of ratcheting up performance and watching that pay off in several years’ time. Investors may not want to wait that long.
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