Talking to Mellon’s Martin McGuinn makes it patently clear that last year’s deal to hive off its traditional retail and small business banking business Citizens, the Royal Bank of Scotland’s US subsidiary, marked a giant step for the Philadelphia-based group. He makes no secret of the fact that his objective in his three years as chairman and CEO has been to narrow the focus of the bank by disposing first of the encumbrance of the credit card and mortgage operations, and then other areas, culminating in this latest shedding – but all the while picking up new businesses on the way.
“We feel we are now well positioned,” he declares, with evident satisfaction. The inventory includes $560bn (e640bn) of assets under management in 14 different operations, making Mellon the seventh largest US manager and eleventh globally. “The other half of our mix is processing and corporate services, including trust and custody, fund administration, cash management, investor services, such as Russell Mellon Analytics, employee benefits and HR consultancy in the form of Buck Consulting. We have a good balance between asset management, process and corporate services and within each there is a really good mix.” Assets under custody and administration are over $2trn.
There is no doubt about the direction – Europe is the strategy. “London is HQ for Mellon Europe and though we have businesses in Japan and Latin America, Europe is our highest priority.” McGuinn says. “We see growth opportunities higher in Europe than anywhere else.”
The two jewels in Mellon’s European crown are Newton on the asset management side and for trust, custody and fund administration, the joint venture with ABN Amro. Newton is to be the springboard for expanding distribution and other activities both in the UK and on the continent and ABN Amro Mellon, as a marketing alliance is to be expanded.
The sale to Citizens netted some $900m. “We are being pursued more than ever by those with ideas, now that we have capital to deploy,” quips McGuinn. “But as we generate some $750m from our operations, we have never been constrained for capital, this just give us excess capital.”
He claims that from an asset management viewpoint the group is now the “preferred acquirer” in the US. The group has built up a stable of 14 institutional investment subsidiaries, each continuing to develop its business under its own name.
“Each firm has a fair degree of autonomy and independence to preserve their entrepreneurial spirit, in particular in relation to managing the funds. But there are areas of shared competency, such as compliance and back office functions. The aim is to make use of the benefits of the large company that we are.” He adds: “So we are working increasingly to co-ordinate their approaches.”
In particular, the group is aiming to leverage on marketing and technology. So, in Europe, for example, there is just one company to market all the asset management services. “The best way of tackling markets outside the US is not to do it 14 times but to co-ordinate. So we established Mellon Global Investments (MGI) as our distribution arm, with Newton focusing on manufacturing.”
John Little, of MGI in London, takes up the running on the investment side. Of the stable US businesses, he reckons around five or six have “very saleable products” in Europe, mentioning in particular Standish, Boston Company, Franklin, Mellon Bond and Mellon Capital. In addition, the group has a 30% stake in Pareto Partners. But he does concede: “There is difficulty in getting the marketing story across compared with the traditional asset manager where there is just one message.” However, that is the point of having MGI as it is to be the one point of contact, he points out. “So we would put forward Boston for a US small cap or Standish for a fixed income mandate and so on.”
In the past year, local sales offices have been established in Milan, Frankfurt, Madrid and in Zurich. “We are developing our range of offshore funds in Dublin and selling those and UK funds on the continent,” says Little. The focus has been retail, with some 30 major distribution agreements being signed, but the institutional side is also coming on stream and last year five segregated mandates were won on the continent, with sales hitting $1bn in Europe, excluding the UK.
What makes Mellon optimistic about the European market is that the “value chain” is splitting in Europe, says Little, as evidenced by the Hypoverein’s and F&C split. “We think the US/UK model and our own in particular will gain greater acceptance,” he says. When it comes to buying managers, the group reckons it is positioned to be the preferred partner. “While no acquisitions are imminent, we have the capital and the resources to pick the opportunity,” says McGuinn. “We want to be sure a manager fits strategically and the investment model adds to our mix.” In the US this is harder to do as the group believes that it has most classes and styles covered.
Generally the group buys 100%, though in Newton’s case this was different. “There was a buy-out which was accelerated as performance was so good. We have a range of incentives and rewards from stock to cash bonuses. In Newton we have done a lot to put in place a very competitive incentive and reward scheme.” McGuinn brushes off last year’s high profile departures from Newton, saying that after the three-year lock-in period, “people want to do different things”. The ability to recruit their successors internally shows “our depth in talent and ensures that the investment process is unchanged”.
On the custody and administration, the name of the game is to leverage on the group’s technology and platform, says Jack Klinck, region head for Mellon Europe. “We have invested a lot of money into our platform and recently we bought a software company Eagle, which is state of the art. We think our technology is superior and when we look at straight through processing and T+1 settlement, we believe our competitors will be faced with very large technology decisions and may chose to exit the business.”
Technology was why ABN Amro approached Mellon and the partnership has been growing the business quickly in the past two years. “It has been accepted that this model works. People were sceptical, but now we are getting closer to the markets, and the organisation is growing in service quality. We put employees from both bodies into one institution and we really work well together,” he says.
Many multinational clients now want to deal with just one custodian across many countries. “There are trends towards dealing with fewer institutions by these groups. But we want to service not just the multinationals but also the domestic players.” It certainly believes it has the capability as the business is very scaleable and different currencies and languages are going to be brought into the platform, he says.
Klinck believes what happened in the UK on the custody side, will happen next on the continent. “There are too many borderline custody players, particularly on the continent that are faced with major strategic decisions about staying in the business or partnering. In the next five years, there will be far fewer custody banks.”
Where Mellon feels its biggest challenge lies is “aligning ourselves with institutions in the largest markets to capture as many of the domestic custody dollar as we can – we have the platforms to do that as well as global custody”. It will be looking to grow the business further with ABN Amro.
“In addition, our challenge will be lining up partnerships, which could potentially confuse the market or create conflicts in the market. Some institutions see themselves as being strong in all of Europe. ABN Amro is exceptionally strong in the largest custody markets.” Mellon will be looking for partnerships outside of Europe as well and while currently, the arrangement is exclusive to ABN Amro in Europe, he says: “We are seeking to revise and reinvigorate certain aspects of our relationship. Things could change going forward.”
He sees continued growth from administration, where more fund managers want to outsource. “We really think we need to be in Luxembourg and the fact that we don’t have an operation there is a priority.”
McGuinn sees increasing synergies between the two sides of the business. “More and more we are dealing with the same clients. If we take out our private clients, we are really serving institutional and corporate clients. By having a breadth of services to offer we can more align ourselves with their needs,” he points out. “We want to sell seven, eight and nine products to these clients.”
“Our objective is to be the best performing financial services company. We do want to be judged on our performance.” Only 15% of revenues arise outside of the US and in the next three to five years that is to grow to 25% - that means double digit growth at least, he says, and for assets under custody, revenue growth in the assets under custody is expected to have a growth rate in the “mid teens” – assuming no acquisitions. Quite an assumption!