By Tim McLaughlin
BOSTON (Reuters) - BNY Mellon Corp's <BK.N> push to reinvigorate its money management business has yet to stem a continuous outflow of client cash from its $322 billion complex of index-based investment products.
BNY Mellon executives delivered more bad news on Wednesday when they detailed $22 billion in net withdrawals from index portfolios during the second quarter. Most of that outflow came from a single, unnamed client that took assets in-house, BNY Mellon Chief Financial Officer Michael Santomassimo said on a conference call.
But since the end of 2014, net withdrawals from index products have totalled $136 billion, according to company financial statements.
The decline in those assets is not a proportional hit to revenue because the bank's index products are mostly low-fee strategies. By contrast, BNY Mellon's $709 billion portfolio of liability-driven investments (LDI), which are popular with pension funds, command higher fees. LDI has been a bright spot in the bank's asset management division, attracting $101 billion in net deposits from 2016 to 2018.
Nevertheless, second-quarter asset management revenue fell 12% to $618 million, compared to the year-ago period. The downturn reflected net withdrawals from investment products and the unfavourable impact of a stronger U.S. dollar, the company said.
But assets under management rose 2% to $1.84 trillion from the year-ago quarter as buoyant markets more than offset outflows and currency impacts.
Shares closed up 2.4% at $44.15 as the company's overall quarterly profit beat analysts' expectations with cost cutting moves.
BNY Mellon manages most of its index assets for institutional investors, with a greater concentration in equities. But some sovereign wealth funds have sold index holdings to raise cash. Other institutional investors have rebalanced portfolios to hold more fixed income or exchange-traded funds, said Desmond Mac Intyre, the CEO of Mellon, BNY Mellon’s affiliated multi-asset investment firm.
The bank does not offer exchange-traded funds or have any major presence in target-date funds, missing out on what has been a seismic shift of money into those products.
Mac Intyre said he expects a turnaround in BNY Mellon index products as his team works more closely with the bank's asset servicing division while adding more products that appeal to clients. Mellon also has reset its investment management fees and securities lending splits to be more competitive for clients, which allows their index portfolios to collect more income from that activity.
On a smaller scale, BNY Mellon offers index mutual funds, but if it cut management fees to be more competitive it would risk undercutting revenue. Its S&P 500 Index Fund <PEOPX.O>, for example, has endured more than $2 billion in net withdrawals since early 2014.
With an expense ratio of 0.50%, the $2.36 billion fund is cheaper than the median price of peers, but at least 12 times more expensive than S&P 500 index portfolios run by Fidelity Investments and Vanguard Group, according to Morningstar Inc.
"You can jumpstart your index fund by cutting the price," said Todd Rosenbluth, director of ETF and mutual fund research at New York-based research firm CFRA. "There is a Catch-22, though, as you risk reducing the profitability of such a product with that strategy."
BNY Mellon has taken a number of steps to reduce the complexity of its asset management business. For example, it has reduced the number of open-ended long-term mutual funds to 92 from 106. And fees have been lowered on municipal bond funds, a BNY Mellon spokesman said.
Last month, the bank dropped the Dreyfus name from its long-term retail mutual funds, allowing BNY Mellon to use its own name as a single global brand for those portfolios.
(Reporting by Tim McLaughlin; Editing by Susan Thomas)