Guggenheim is poised to become a heavyweight

Guggenheim, which was founded in 2000 by a great-grandson of 19th-century mining tycoon Meyer Guggenheim, is the last bidder standing for Deutsche Bank AG's U.S. asset management business, according to a statement released by Deutsche Bank last week. The deal would more than quintuple Guggenheim's assets under management to $650 billion and vault it from the 164th-largest asset manager to among the top 25 in the world. Deutsche Bank reportedly is seeking between $1 billion and $2 billion in the sale, according to a report in The Wall Street Journal.

"TRANSFORMATIONAL'

“It's a transformational deal if it goes through,” said Darlene DeRemer, managing director at industry consultant Grail Partners LLC. “Guggenheim isn't considered a major asset management firm today, but this deal would clearly put them in a much better position.” Deutsche Bank's U.S. asset management business has about $525 billion in assets. Guggenheim would acquire Deutsche Bank's DWS Investments mutual fund family, its institutional asset management DB Advisors, and also its insurance and real estate arms. Deutsche Bank said in November that it was considering selling some of its asset management business to raise capital. With the addition of the DWS mutual fund family, Guggenheim would round out its investment offerings, which already include exchange-traded funds, closed-end funds and alternatives mutual funds. “It would be a nice complement,” Ms. DeRemer said.

MUNI BOND TEAM

The biggest boost could come from DWS' municipal bond investment team, said Flynn Murphy, a mutual fund analyst at Morningstar Inc. The muni bond fund management team, lead by Phil Condon, has been DWS' strongest performer — an area in which Guggenheim lacks a track record, Mr. Murphy said. Guggenheim launched its first muni bond mutual fund in January. The DWS muni bond funds have about $8 billion spread across three strategies, each of which has at least a 10-year track record that ranks in the top half of its category. Representatives of Deutsche Bank and Guggenheim didn't return calls seeking comment. Acquisitions are seen as a particularly appealing avenue for growth in this environment because organic growth is proving to be hard to come by, Ms. DeRemer said. Other industry watchers agree. “Overall, the appetite for M&A activity remains high globally, with asset managers finding it difficult to achieve organic growth due to increased competition for assets, volatile asset values, fee pressure and rising compliance costs,” according to a PricewaterhouseCoopers LLP outlook report for asset management mergers and acquisitions in 2012 released last week. The rising use of ETFs and other low-cost passive investments is especially hurting traditional asset management firms, said John Meunier, principal at Cogent Research LLC. A recent study by Cogent found that overall mutual fund usage is down among investors with more than $100,000 in investible assets. Last year, 71% of affluent investors responded that they owned at least one mutual fund, down from 75% in 2010. Roger Yates, global chief executive at Pioneer Investments, echoed those thoughts during a conference call discussing Pioneer's strategic review of its U.S. asset management business last week. “Globally, the asset management place has been a tougher place to be than in the past,” he said.

SMALLER PIE

The shift toward risk-adverse and passive investing means that the pie for which generalist asset managers are competing is growing smaller, Mr. Yates said. Pioneer doesn't plan to sell its business, though, he said. Instead, it will go against the grain and focus on trying to build the business organically. Guggenheim is no stranger to the acquisition market. Its entire business, in fact, was pieced together largely through acquisitions over the past two years. Because Guggenheim is a private company, it hasn't disclosed where it got the funding for the acquisitions. In 2009 it purchased Claymore Group, which laid the groundwork for its ETF business, and in 2010, it purchased Security Benefit Corp. and its family of Rydex SGI alternatives mutual funds and ETFs. Guggenheim recently completed a re-branding of its entire fund lineup under the Guggenheim name so that all its funds are under the same brand.