State Street Eyeing Actively Managed ETFs

State Street Corp., known for its passive asset management, may soon expand its small active management business.

The Boston company is in talks to buy the asset management unit of Bank of Ireland, according to Bloomberg News. Neither company has confirmed the talks. The move would get State Street, which is the second-biggest player in the index funds arena, into a lucrative business while continuing its global growth, analysts said.

At the end of the second quarter, State Street had $1.8 trillion of assets under management, and just 5% of that total was actively managed.

It has been an active acquirer abroad. In December, it announced a deal to buy Mourant International Finance Administration, a Channel Islands service provider for alternative assets. The acquisition brought State Street about $600 billion of alternative assets under administration.

That same month State Street bought the securities services business of Italy's largest retail bank, Intesa Sanpaolo SpA of Milan, for $2.5 billion. The business includes global custody, fund administration, depository bank services and correspondent bank services.

If State Street is able to strike a deal with Bank of Ireland to buy its Bank of Ireland Asset Management unit, the acquirer would gain a platform for a business that is not only more lucrative than passive management, but that appears to have greater growth potential as well, said Michael Kon, a senior analyst with Morningstar Inc.

"State Street is already one of the biggest passive asset managers in the world," he said. "And the growth opportunities in passive management are not that attractive."

Bank of Ireland Asset Management reported pretax profit of $22 million for the first half of this year, and asset management revenue of $58 million.

State Street Global Advisors is known as the second-largest provider of exchange-traded funds. ETFs are mostly passive, index-based investments.

In an interview from early August, Scott Powers, head of State Street Global Advisors, said the asset manager was eyeing targets in the active management business. State Street is not a stranger to Bank of Ireland: Since 2001, it has provided passive investment management for Bank of Ireland Investment Management.

As a passive investment manager buying into active management, State Street's deal would be a mirror image of BlackRock's merger with Barclays Global Investors, the global investing unit of Barclays PLC. That deal, which more than doubled BlackRock's assets under management and gave it a sizeable passive management platform, was announced in June.

Bank of Ireland's apparent willingness to shop its $32 billion-asset BIAM unit fits a pattern of banks parting with their investment businesses in an effort to strengthen their financial positions, said Burton Greenwald of BJ Greenwald & Associates in Philadelphia.

"It is indicative of what's going on in banks that have serious financial issues and have to build capital," he said, noting that Bank of Ireland is in poor shape. "The first thing they can sell is their asset management business."

In the fall of 2009, for example, Ameriprise Financial Inc. agreed to buy Bank of America Corp.'s Columbia family of stock and bond funds. And Invesco Ltd. announced it would acquire Morgan Stanley's retail investment management business.

Early this year, Bank of New York Mellon reached a deal to buy the global investment servicing unit of PNC Financial Services Group.

The M&A activity has not been limited to banks; in January 2010, Macquarie Group of Australia completed its purchase of Delaware Investments from Lincoln National Group. Macquarie was reportedly in talks to buy BIAM before recently dropping out.

One factor driving these deals is attractive pricing, Greenwald said. Investment businesses' assets under management remain lower than they were at the end of 2007, and prices of such businesses are typically derived from their asset levels.

The prices in recent deals for large asset managers have averaged 1% of the assets under management purchased, according to Citi Investment Research.