October 20, 2016 / 3:25 PM / in 3 years

UPDATE 2-BNY Mellon may be a player as asset management sector tightens

(Recasts throughout to include analysts comments on potential acquisition targets, stock price)

By Tim McLaughlin and Ross Kerber

Oct 20 (Reuters) - BNY Mellon Corp, the world’s largest assets custodian, could be in the hunt for an acquisition to build its investment management arm, which analysts said could benefit from an exchange-traded fund provider to retail investors.

Kyle Sanders, an equity analyst at Edward Jones, said the bank may expand its reach with ETFs, adding that there will be no shortage of potential takeover targets as consolidation accelerates in the U.S. asset management industry.

“Consolidation is an absolute necessity,” Sanders said. “If you are not a top 15 asset manager, you’re looking to marry up.”

BNY Mellon’s investment arm manages about $1.7 trillion in assets and counts big institutional investors as its bread-and-butter clients.

BNY Mellon Chief Executive Officer Gerald Hassell did not rule out being a buyer as the market punishes smaller asset managers with underperforming funds.

“I do think there will be further consolidation,” Hassell said after an analyst asked if BNY Mellon might buy. “It’s going to be a scale business. We’re always mindful of looking at our portfolio the right way from a business and shareholder perspective. So we’ll see.”

Hassell made his remarks during a conference call after the company reported a better-than-expected third-quarter profit on Thursday. Its shares rose nearly 4 percent to $42.02.

Mitchell Harris, who runs BNY Mellon’s investment management arm, put a finer point on the outlook for small, struggling asset managers.

“If you don’t have good performance you’re not going to survive,” Harris said on the same call. “So you’re going to see a lot of (bottom half) equity performers having to merge or get out of the market. It’s not sustainable.”

Actively managed stock funds, in particular, have been hurt by investor withdrawals in a long-running trend favoring less expensive index mutual funds and ETFs.

Earlier this month, Janus Capital Group Inc agreed to sell itself to U.K.-based Henderson Group Plc for about $2.6 billion. The deal gives more scale to Janus as it will be part of a London-based money manager with about $320 billion in assets. Janus has struggled as investors have pulled money from its funds.

Many analysts and executives in the asset management industry see the deal as a tipping point for more consolidation.

Gabelli & Co analyst Mac Sykes sees Cohen & Steers Inc and Waddell & Reed Financial Inc as potential targets.

Cohen & Steers is relatively small, managing about $61 billion in assets, with a big focus on real estate investing. But the company is not struggling.

Its shares are up 32 percent in the past 12 months, and this week reported a 19 percent increase in third-quarter revenue from a year ago. The company also collected $2.2 billion in net deposits from investors in the third quarter.

Cohen & Steers did not return a message seeking comment.

By contrast, assets under management at Waddell & Reed declined by 9 percent to $86 billion in the second quarter.

Its stock is down 49 percent in the past year and CEO Philip Sanders said in July, “The company is not without challenges.” Third-quarter results are due on Oct. 25. The company declined to comment.

Sanders at Edward Jones said another potential takeover target could be ETF-provider WisdomTree Investments Inc as a bolt-on acquisition for a larger asset manager.

WisdomTree shares are down 42 percent over the past 12 months. Net withdrawals from its ETFs totaled $12.7 billion in the first nine months of this year, according to research by State Street Global Advisors. The company did not return a message seeking comment.

Gabelli’s Sykes said it was more likely that large Asian firms would be buyers of U.S. fund firms. He pointed to a string of recent deals, such as Nomura Holdings Inc’s purchase of a 41 percent stake in American Century Investments, completed in May. (Reporting By Tim McLaughlin; Editing by Chizu Nomiyama, Bill Trott and Jeffrey Benkoe)

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