Wealth - Bulletin

The company, one of the largest asset mangers in the UK, said its asset under management had fallen from £139bn (ˆ174bn) at the start of the year to £115bn. This directly affects its revenues, which are charged as a percentage of assets managed, and the group's third quarter profit before tax accordingly fell from £98m in the third quarter of last year to £78m, a drop of almost 21%.

The fall in assets under management resulted from market movements, accounting for £20bn of the fall, and net outflows, accounting for £5bn, with acquisition adjustments giving rise to a slight increase in assets under management. Most of the fall took place in the third quarter, according to the group.

The directors of Schroders said the outlook was gloomy: 'In an environment of sharply lower equity markets and significantly reduced investor demand, asset management revenues will inevitably decline further. We expect this challenging environment to persist through most of 2009.'

The directors then went on to say: 'We are reducing our cost base, which will partially offset the decline in revenues.'

The company, whose chief executive is Michael Dobson, has told equity analysts to expect cuts in marketing, whose budget this year was £35m to £40m, and information technology, where the budget was £30m. It also said it would try to maintain the ratio of compensation to revenue.

Citigroup equity analyst Hayley Tam said this morning: 'The fact that the company has been able to say it will address the situation by cutting costs has been a positive: there was some uncertainty that it would do so. Dobson has a lot of experience in this area so I am confident Schroders will be able to make its cuts.'

The market agreed, lifting Schroders' share price 6% to 709p at 12 noon GMT.

Tam, who three weeks ago published a research note on Schroders that sent its share price falling by 25%, said Schroders' share price had fallen too far, given that it has a lot of cash on its balance sheet: 'When you step back and look at its accounts and the fact that it h as £835m of suprlus capital, it starts to look oversold. It also has the advantage of the big, Schroder family stake.'

But equity analysts expect further falls in assets under management, revenue and profits at Schroders and most other asset management companies. Morgan Stanley expects Schroders' assets under management to have fallen to £106bn by December 31 while Citigroup expects it to fall to £90bn, while their expectations of pre-tax profit are not much higher than the figure for the first nine months.

Schroders' peers including F&C Asset Management, Henderson Global Investors and Aberdeen Asset Management, have been considering cost-cutting measures amid the continued market turmoil.

Michael Long, an equity analyst at investment bank Keefe, Bruyette & Woods focusing on asset managers, said last week “There has been cost-cutting in listed players. In the UK, Henderson has been the highest profile, F&C Asset Management has hinted at headcount reductions and others could also need to trim staff numbers.”

The four issues affecting all asset managers are the decline in asset values, as a result of market falls; the departure of retail investors, many of whom have taken fright at the market falls, or who need cash for other purposes, such as putting money down on a home, or who can obtain decent returns from putting their money into a bank deposit; a shift of institutional investors from high-margin investment products, such as specialist equity mandates, to low-margin products, such as bond mandates or passive investment; and increased pressure on fees generally.

Equity analysts including Goldman Sachs and Morgan Stanley have said they anticipate these pressures dampening profitability until at least 2010.

Mitsubishi UFJ Financial seeks to raise £6.58bn via rights issue

Financemarkets.co.uk

Mitsubishi UFJ Financial Group is planning to shore up its balance sheet by raising 990 billion yen (£6.85 billion, $10.5 billion) by issuing new shares.

Japan’s largest bank is to issue common stock of 600 billion yen and 390 billion yen of preferred shares.

The news came after Japan’s Nikkei index closed 6% down - its lowest close since 1982. Shares in the bank closed down 15% following the news.

As with other financial institutions, Mitsubishi UFJ’s market value has dwindled amid the falling stock market. Investors have sold shares in the Japanese banking giant amid fears that their heavy exposure to domestic equities could spark the huge losses that have affected its counterparts on Wall Street.

However, Japan’s Government has announced steps to relieve the strain on banks. Prime Minister, Taro Aso, said the Government would expand a scheme that provides banks access to public funds and also strengthen regulation on the short-selling of shares.

In related news, last month it was announced that Mitsubishi UFJ is to acquire a 20% stake in Morgan Stanley for $9 billion (£4.8 billion). Furthermore, it is to pay $3.5 billion in cash to take full control of UnionBanCal, California’s second-largest bank, and is to increase its stake in Acom (the Japanese consumer lender) from 16% to 40%.

Bloomberg

Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

Redemptions were $46 billion in September, mostly from funds that invest in corporate debt, Morgan Stanley said in an Oct. 9 regulatory filing. The New York-based company made sure the money-market funds had enough cash to repay investors by acquiring some of their assets with financing from "various available stabilization facilities.''

Morgan Stanley may have relied on one or more programs set up by the Federal Reserve in the past month to prop up the $3.54 trillion money- market fund industry, analysts said. The Fed has taken steps to restore investor confidence shattered by losses last month at the Reserve Primary Fund, the oldest U.S. money-market fund.

"The outflows in money-market funds were unprecedented, savage'' said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts, firm that tracks the industry. "Broker-dealers in particular got hard hit because of concerns about their parent companies.''

Morgan Stanley bought the fund assets to "ensure that redemption obligations were met amidst illiquid trading markets,'' Erica Platt, a spokeswoman for the firm, said in an e-mailed statement. Fed spokeswoman Susan Stawick declined to comment on whether Morgan Stanley had used central bank financing to aid its money-market funds.

Run on Funds

Individuals and institutions use money-market funds to earn a yield until the cash is needed. They are considered the safest investments after bank deposits and U.S. Treasuries, in part because they buy only highly rated fixed-income securities with an average maturity of 90 days or less. That reputation was undermined by the Sept. 15 bankruptcy filing of Lehman Brothers Holdings Inc.

The following day, the $62.5 billion Reserve Primary Fund said it wrote down to zero the value of $785 million of debt issued by the investment bank. That caused its asset value to fall below the $1-a-share purchase price, the first money-market fund in 14 years to break the buck. New York-based Reserve Management Corp. froze the fund.

The news triggered a run on prime money-market funds, which buy both corporate and government debt. Shareholders yanked $488 billion during the month from prime funds, according to data compiled by Westborough-based iMoneyNet.

Morgan Stanley shares fell as much as 69 percent during the week of Lehman's bankruptcy filing to a low of $11.70. The company's money funds have remained at $1 a share ``during the unprecedented market turmoil,'' Platt said in the e-mail.

Two Solutions

BlackRock Inc., the biggest publicly traded U.S. asset manager, said last week that investors pulled $53.8 billion from its prime money-market and securities-lending funds during the last two weeks of September. The funds, which have regained $13.8 billion since Sept. 30, met the redemptions with cash on hand and securities sales, according to spokesman Brian Beades.

Morgan Stanley injected cash into its money-market funds by purchasing their investments in municipal debt, certificates of deposit and commercial paper, which had become difficult to sell on the open market, according to its 10-Q filing with the U.S. Securities and Exchange Commission. The move permitted Morgan Stanley's funds to repay shareholders without having to sell the securities at a loss.

Morgan Stanley, which had $134 billion of money-market assets as of Aug. 31, didn't specify in the filing which funds had outflows. According to monthly notices sent to investors, its Prime Portfolio dropped to $10.4 billion from $36 billion during September and its Money Market Portfolio fell to $5.8 billion from $14.7 billion.

Fed Role

Both Morgan Stanley funds had more than 55 percent of assets in commercial paper at the end of August, according to the investor notices. On average, prime money-market funds had about 45 percent of assets in the corporate IOUs at the end of August, according to iMoneyNet.

Platt declined to describe the "stabilization facilities'' that primarily funded Morgan Stanley's securities purchases from the money- market funds. The most likely source was the Fed, which has set up at least five funding facilities to help ease the credit crunch, including one unveiled Sept. 19 to provide banks and some brokerages with loans to buy asset-backed debt from money-market funds.

`Only Choice'

In addition, the Fed two days later approved applications by Morgan Stanley and Goldman Sachs Group Inc. to become bank holding companies - ending the era of stand-alone investment banks - and increased the availability of loans to the two firms. The Fed announced a Money Market Investor Funding Facility last week that will provide up to $540 billion in loans to buy assets, including commercial paper and certificates of deposit from funds hit with redemptions.

"Morgan Stanley faced the same problem as every other firm: the markets were very illiquid,'' said Brad Hintz, a securities-industry analyst at Sanford C. Bernstein & Co. in New York. "Its only choice for financing was to go to the Fed.''