Mutual fund industry enjoying a burst of wheeling and dealing

The $30 trillion mutual fund industry is enjoying a burst of wheeling and dealing, but if recent history is any guide, it may be years before those mergers pay off for the companies and the financial advisers who use their investment products. Last Monday, Janus Capital Group Inc. said it would buy the firm that builds VelocityShares exchange-traded funds and notes, which gives the mutual fund brand name a presence in the fast-growing ETF market. Janus' announcement came after TIAA-CREF, a major provider of retirement services for nonprofit organizations such as universities and hospitals, built out its asset management operation with the $6.25 billion purchase of Nuveen Investments Inc. The Nuveen deal, which closed Oct. 1, was the largest mutual fund company transaction since 2009. The latest round of deal making is being driven in part by an effort of the fund companies to expand their products and services quickly. “A firm that has a broad range of investment capabilities and a strong range of vehicles to meet client needs is better able to work with financial advisers,” said Martin L. Flanagan, president and chief executive of Invesco. “There are very few firms that have that range of capabilities.” Invesco, the 11th largest by assets in the ETF and mutual fund business, is itself a voracious acquirer, bringing together fund brands like AIM, PowerShares and Van Kampen. Only PowerShares, an ETF business acquired in 2006, has been maintained as a separate brand.

MORE DEMANDS

“What has happened in the time post-crisis, is the clients rightfully are being more demanding,” Mr. Flanagan said. “As we looked at our organization, we wanted to make sure we could meet those needs.” Making deals is one thing. Making them work is quite another. Though many firms head into mergers and acquisitions with good intentions — expanded product lineups, lower costs due to scale and upgraded talent — the vast majority find themselves living with unmet expectations. One of the biggest, and least appreciated, obstacles to a successful deal, experts say, is cultural integration. “There are a few firms that have done acquisitions well, but I suspect more than half the acquisitions fail to do what's expected of them upon closing,” said a consultant who advises top fund managers and asked not to be named to avoid offending clients. “We make consistently big mistakes on culture and don't appreciate how different firms can be.” Of course, that has never stopped firms from trying. The previous round of deal making occurred in the late 2000s when the global financial crisis threatened the existence of banks and caused three to sell their fund units. The mergers created a new leader board in the investment management industry. First, Barclays in June 2009 sold a unit that included its iShares ETFs to BlackRock Inc., a deal that topped $15 billion and created the world's largest money manager. In September 2009, Bank of America Corp. sold its Columbia mutual funds to Ameriprise Financial Inc. for roughly $1 billion in cash. And on Oct. 19, 2009, Invesco agreed to buy Van Kampen from Morgan Stanley & Co. for $1.5 billion in cash and stock. High-stakes wheeling and dealing is big news when it happens. But the results, so far, are mixed. Five years after the wave of acquisitions, giant firms Invesco, Ameriprise and BlackRock are trying to recast their image in the minds of advisers as being completely aligned with their customers' needs. In doing so, each firm has been singing from the same hymnal. At a trade conference in May, the top executives of BlackRock and Invesco and the chief investment officer at Columbia talked about the virtues of focusing on the upshot for clients. “We have to be focusing on outcomes,” said BlackRock chairman and chief executive Laurence D. Fink at a Washington D.C. meeting of the Investment Company Institute, a fund industry trade group. “This is something we have not done a good job of as an industry.” By its own account, Invesco continues to struggle to rebrand itself in the wake of its deal making. “We think there's a perception and reality gap in the marketplace,” Mr. Flanagan said. “We changed the name. Invesco was never a brand in the adviser channel until 2010. It was known as AIM in the channel. You're really starting over with a different brand and it just takes time.” At Ameriprise, the acquisition of Columbia expanded the firm's asset management unit, which previously sold RiverSource funds largely through Ameriprise brokers. Now that unit has relationships with a broad set of third-party platforms, including a distribution agreement with U.S. Trust, the private banking arm of former Columbia owner Bank of America, according to Ted Truscott, the chief executive of global asset management for Ameriprise. But he said it “definitely can be a challenge” to make two investment cultures work together without losing talent. He said Ameriprise quickly made personnel decisions after signing the deal. “Everybody knew what products they were managing, what teams they were on, and who had a job and who didn't,” Mr. Truscott said. “There wasn't a lot of uncertainty hanging over the place. That's what a successful asset management acquisition should look like.” BlackRock representatives declined to comment for this story. To be sure, the M&A activity of the late 2000s has resulted in some benefits. BlackRock, for example, has benefited from its exposure to new business lines. To wit: Investors have withdrawn about $44 billion each from BlackRock and Columbia's mutual fund offerings since 2009. But BlackRock has better weathered those outflows because of its other units, like iShares, which added $231 billion in new assets over that period, according to Morningstar Inc. BlackRock's distribution capabilities helped iShares, which was an early pioneer in index investing and ETF product development. BlackRock has a longstanding relationship with platforms that serve brokers and financial advisers, including Merrill Lynch, from whom it acquired a mutual fund business in 2006. Invesco's PowerShares unit has similarly helped the firm attract money as investors increasingly used those products for inexpensive exposure to the market's largely upward movement since 2009. PowerShares brought in $32 billion in new money between June 2009 and the end of August this year, while Invesco-branded funds lost about $18 billion, according to Morningstar.

ACTIVE V. PASSIVE

Having both units “keeps us out of the debate around active and passive,” said Andrew Schlossberg, a managing director at Invesco who leads U.S. retail distribution and its global ETFs unit. Mr. Flanagan said his firm's purchase of Van Kampen deepened the focus both brands have on a primary purpose: meeting clients' needs and delivering top investment performance. (The firm's mutual funds have an average five-year Morningstar rating of 2.84 stars out of five.) The Van Kampen acquisition complemented Invesco's offerings by adding strength in value-driven stock picking and municipal bonds, according to Kathryn Spica, a Morningstar analyst who covers the firm. While acquisitions have been helpful, the firm now needs to focus on making them work, rather than making new purchases.