It is a year this Friday since Deutsche Bank sold its 46bn (€67bn) UK investment management business to Aberdeen Asset Management, which led to a drastic restructure in which 20% of Deutsche Asset Management’s staff left.
Kevin Parker, global head of asset management, is pushing for his group to expand again worldwide but will limit investment management offices to New York and Frankfurt. He wants to roll out Deutsche’s retail brand DWS in the US and Asia-Pacific region, widen its alternatives product range and improve global distribution in the institutional unit. The first two intentions are fair, say consultants, but the bank has ground to cover in institutional work before it measures up to the competition.
Deutsche’s institutional business is financially behind that of its retail and alternatives units; it generates the lowest revenues at €267m ($333.8m), despite representing the largest pool of assets. The institutional business has €249bn in assets, DWS €235bn and alternatives €60bn, which is concentrated in Rreef, Deutsche’s real estate management arm. Merrill Lynch analysts estimate the institutional business made a loss of 165m last year.
At an analysts’ conference in May, Parker said his goal was for Deutsche Asset Management to be a top-three global institutional franchise. He is introducing performance-based compensation, building higher margin products, focusing on investment consultants and aiming to develop a global brand. He emphasised the need for product depth, which will involve producing higher margin products in equities, insurance and pensions, specialty fixed income and structured products.
Bankers said the US office was also looking at small-scale acquisitions in quantitative and value-orientated equity products.
As Parker rallies his team to become global again, it is hoped he has made changes to the way his sales staff are remunerated. Deutsche’s attempts at globalisation in selling US products in Europe were abandoned years ago, according to a former Deutsche Asset Management employee. As a spin-off from the index business, Dean Barr, now at Citigroup Alternative Investments, and Janet Campagna sold quantitative products in the UK but their efforts came to a halt when the index funds business was sold to Northern Trust in 2002.
Former employees said the reason international cross-selling failed was because sales people were remunerated by local management and made nothing from sales outside their domestic market.
“The lack of a transfer pricing mechanism created turf wars,” said a former employee. “When there is a shared interest, it creates the biggest problems.”
Fund management groups such as Connecticut-based Bridgewater manage this conflict successfully because they have a single profit and loss account, and one cost base. But Deutsche, with its international offices, has been managed along regional reporting lines, which made working as a global group difficult. Under Parker, the bank has removed regional business units to set up a global network divided between retail, alternatives and institutional. Changes to remuneration structures are unclear. Deutsche declined to comment.
After Parker’s statement in May, consultants questioned what Deutsche will sell through its global institutional channel. Although global performance had been poor, much global expertise was concentrated in the UK business sold to Aberdeen.
Of Deutsche’s €544bn in assets, 40% is in fixed income. It claims to be the leading manager of non-affiliated insurance assets, a notoriously low margin business. However, selling its fixed-income expertise to UK clients is likely to be difficult, say consultants.
“Deutsche’s biggest problem in the UK is that it sold its crown jewels to Aberdeen,” said a UK consultant. The US core-plus product managed by Steve Ilot, which consultants rate highly, has gone to Aberdeen. The consultant added that selling products managed in Frankfurt to a UK audience would also prove testing. She emphasised continental European fixed-income managers have less expertise in credit, currencies and the use of derivatives in fixed-income mandates.
“How many managers whose manufacturing is based on the continent have been successful in selling products in the UK? It’s an interesting challenge,” said a rival European fund manager.
Deutsche has also been developing portable alpha capability under Campagna, head of quantitative strategies, in New York. It is coming to market as portable alpha managers are nearing capacity or have closed. “Everyone is looking for Bridgewater mark two, now that it has closed, which plays well into Deutsche’s hands” said a former employee.
Deutsche launched its US-enhanced stable value fund in March, which combines a value portfolio with the quantitative strategy group’s integrated global alpha platform. The first investor was a large corporate client with $610m (€488m).
The fund, targeted at the defined-contribution market, aims to enhance yield and return with little added volatility. Deutsche runs about €5.4bn in quantitative strategies, according to Parker. While Deutsche could attract clients for quantitative mandates in the UK, portable alpha is proving difficult for others.
Although separate from the institutional business unit, alternative investments are important for Deutsche in serving pension funds. The alternatives unit has credible products, strong brand recognition through Rreef and delivers healthy revenues. And, unlike the institutional business, Rreef has investment management offices in 19 cities, including San Francisco and Sydney.
Last year, Deutsche discussed whether it would put its hedge funds, formerly DB Advisors, and other alternatives into Rreef. However, some of its largest US pension fund clients protested, saying diluting the Rreef brand would be damaging. Instead Rreef sits within alternatives but operates under its own name.