As the oldest bank in the United States, The Bank of New York has seen many changes over the past 220 years. But perhaps none as important as the regulatory changes being ushered into the financial services industry by the Securities and Exchange Commission within the last several months.
BONY is the leading provider of global products and services to the world's financial institutions, including a host of back-office services to the mutual fund industry. The Bank of New York is also the investment advisor to the BNY Hamilton Funds family and the parent to Ivy Asset Management, the $14.6 billion hedge fund manager-of-managers that the bank acquired in 2000. It also bought Lockwood Financial Services and Pershing last year, which it then merged to provide a single platform for managed accounts for the financial adviser marketplace.
Bank of New York President Gerald L. Hassell recently sat down with Money Management Executive Editor-at-Large Lori Pizzani to discuss operating in this heightened regulatory environment and the bank's strategic areas of growth. A 30-year-plus veteran of the bank, Hassell has served as its president since 1998.
MME: What are the fastest-growing segments of your business?
Hassell: The two fastest-growing areas are our hedge fund-of-funds manager, Ivy, which continues to perform very, very well, and our alternative investments services business. Ivy was a U.S.-based hedge fund-of-funds manager, but it has expanded and now chooses global hedge fund managers and has global investors. It now also includes a couple of Asian private-label funds, and we are very pleased with the reception throughout Asia and the Middle East.
As for the alternative investments servicing business, it was the right product at the right time. We first entered this hedge fund servicing market after purchasing a small company, International Fund Administration of Bermuda, more than a year ago. Assets under administration are up 30% this year. We can now service hedge fund clients in offshore areas including Dublin and Bermuda.
As a point of note, we also have a Bank of New York servicing platform in Ireland through an alliance with Allied Irish Bank that allows us to provide services to the Ireland offshore market. We really do see the international markets as real growth vehicles for us. Offshore markets are seeing a more rapid rate of growth than domestic markets.
MME: Which businesses do you expect to add the most to your bottom line in 2004?
Hassell: We already discussed two areas that have added to our breadth of services. But we also look to our core securities services to financial institutions. These include custody, ADRs [American Depository Receipts], execution and clearing services and corporate trust. We also have Treasury management services through which we provide cash management, funds transfer, trade financing and more services.
And, of course, there is our asset management side. We have clearly been putting more capital into our asset management business through our acquisition of Ivy, as well as Gannet Welsh & Kotler, which we acquired in 2002, and Estabrook Capital Management, acquired in 1999.
MME: The Bank of New York is obviously a big believer in acquisitions, with 80 acquisitions having been made across the company since 1995. Why make acquisitions versus building a capability internally?
Hassell: It is a question taking too long to get us where we want to be. Beyond that, acquisitions also bring us a customer base with name recognition, a track record and scale.
MME: Is there any area of asset management that you might consider adding via another acquisition?
Hassell: We continue to look at specialist firms. We could use some strength in fixed-income strategies. The Bank of New York has been a money market fund and long-only equity manager, so an acquisition is possible if it added to our capabilities, just as the acquisition of Ivy gave us more strength offshore.
MME: Would you consider adding another hedge fund manager subsidiary to complement Ivy's core competency?
Hassell: Yes. In addition, the hedge fund servicing area may be ripe for consolidation. As more and more money flows into hedge funds, people want more of an institutional servicing platform. There could be an acquisition opportunity for us here.
MME: Are there concerns among other hedge fund managers that you are now competing in their space by both servicing hedge funds as well as building your own sponsorship of hedge funds through Ivy?
Hassell: No, we really haven't seen that. That's because Ivy is a hedge fund-of-funds manager, so we are not competing with them. We are directing money into many hedge funds instead of trying to siphon off assets. Our reputation for servicing puts a Good Housekeeping seal of approval on their attracting new hedge fund investors.
MME: Which sector do you see as your most important clientele right now?
Hassell: We are an institutionally driven organization, except for our private client group and traditional banking services offered in New York. The largest users of our services are financial institutions, broker/dealers and governments. Financial institutions have the greatest wallet size. We have specialists lined up against each industry channel to bring the best solutions to each of those clients.
MME: You are the number two player in servicing domestic mutual funds. What stands between you and the top spot?
Hassell: From a product point of view, nothing. We both have the same capabilities. But the differentiating factors for us lie in the nature of the rapport with clients and the quality of services. We may both offer mutual fund servicing, but we like to think we do more with them. After that, it's a dog-eat-dog street fight, but a healthy competition.
MME: Separately managed accounts have become a significant business line for your firm, both through Lockwood and Pershing. How would you like to enhance this capability?
Hassell: By putting Lockwood and Pershing together, we have an SMA capability that we feel is unmatched. Now it's about getting our story out, about the breadth of capabilities that we can offer registered investment advisors.
We're not trying to steal their clients. Our model is very neutral, and we've added a lot of capabilities. We have added trust services, mortgages, credit cards and traditional banking in the Pershing platform, and we've married Pershing, Lockwood and Bank of New York to make the service offerings include asset allocation and research models.
MME: Getting back to asset management, we know that the BNY Hamilton Funds quietly went to a broker-sold load structure earlier this year from a no-load format. What plans do you have for the fund group?
Hassell: We are not looking to become a large retail mutual fund shop. We are looking to build out institutionally styled funds and get wholesale capabilities to get them on the right platforms to sell to foundations, endowments and pensions, both state and private.
MME: What goals do you have for 2005?
Hassell: We do have acquisition aspirations in order to build out some of the competencies. We have a good relationship and rapport with our institutional clients.
Wouldn't it be nice to marry institutional asset management with that?
MME: In your opinion, how will increased regulations impact the investment management business of banks in 2005 and beyond?
Hassell: I don't think the heightened regulatory environment is going to go away anytime soon. Investment managers will be required to be more diligent and more compliant and have better oversight. We have built Web-based products to help chief compliance officers. That is a very good example of how we're providing solutions to our clients.
There will also be more risk measurement and performance measurement in 2005. I think there is an opportunity for us here. We have recently hatched an alliance with Wilshire Associates to provide risk management services to institutional investors. Investment managers cannot afford to do risk management on their own to the degree that will be required. They need tool sets.
Also, the push for the registration of hedge funds will clearly be a new burden. Ivy has both registered and unregistered hedge funds. The Federal Reserve has made its position known that it doesn't favor registration. Hedge fund investors are highly sophisticated. But there are risk concerns that hedge funds will be offered to more mass-market individuals, as well as pensions and endowments that may not really be sure what they are getting.
MME: Do you think that the continued globalization of markets will prove difficult for many firms to navigate, especially if domestic businesses cool off?
Hassell: If you have the bandwidth, it will be good. But you have to have size and scale. If you don't, you could spread your resources too thin.
I think you will see more acquisitions on the investment management side. Investors want more cross-border investing. With all of the multi-currencies, multiple corporations and multiple regulatory schemes, it is more than a three-dimensional chess game these days.
MME: Do you think that hedge funds will become a "must have" staple of investment managers and investors?
Hassell: Yes, it will become a staple asset class in the future. A local endowment that would consider allocation a small portion to hedge funds now, say 1% or 2%, will eventually be allocating 15% or 20%.
MME: What keeps you up at night?
Hassell: Long-term, managing the risk of this organization because of the infrastructure of global markets. It's not really a worry but I think about it a lot.
For the short-term, the tone and manner of regulatory themes. I think the pendulum has swung too far in terms of the penalties, even for making mistakes.