James Gorman, CEO of Morgan Stanley, has just completed a pivot that began more than a decade ago.
With Thursday's announcement that Morgan Stanley is taking over investment manager Eaton Vance for $ 7 billion, Gorman is expanding the smallest of the New York-based bank's three main businesses: the maker of mutual funds and other assets.
This completes Morgan Stanley's transition from a trader and investment banker dominated company to one that manages the rules of money in a more subdued and reliable manner.
The bank began this journey in early 2009 when Morgan Stanley Smith bought Barney from Citigroup in the midst of the financial crisis, attracting thousands of financial advisors in the process. This year, Gorman went a step further, announcing the acquisition of discount broker E-Trade, valued at $ 13 billion, to expand its reach in bulk assets.
Following recent $ 20 billion in deals, the bank will now generate well over half of its income from asset and investment management fees – it owns a $ 1.2 trillion mutual fund factory and one of the world's largest armies of financial advisors who are supposed to evict you.
"We wanted to make sure that Morgan Stanley is stable in the water in very difficult times," Gorman said in an interview with analysts on Thursday. "A decade ago, our wealth management and wealth management businesses were bright, but they weren't big enough, they weren't big enough to provide real stability for the rest of the company."
With the two recent acquisitions, Morgan Stanley would have generated $ 26 billion in 2019 revenue in terms of wealth and investment management, making it the top-selling company in the world, the bank said. Total client assets will be $ 4.4 trillion.
But investors haven't yet recognized Morgan Stanley's transformation, Gorman said.
"Our dear competitor Schwab, who is a great company, is currently trading at 20x profit in my opinion," said Gorman. "And we act as if we were a pure trading business with a 9-10 fold profit. That makes absolutely no sense."
If his company traded mid-way between the two categories at 14 or 15 times earnings, "that stock would be $ 100" instead of the current level of $ 49, Gorman said. "You have to play the long game here."
For Eaton Vance, a medium-sized company specializing in actively managed funds, the deal relieves the pressure on any asset manager other than Vanguard, BlackRock or Fidelity. The move to low-cost passive investments has resulted in seismic changes across the industry.
"You are making a good asset in a difficult industry," said Devin Ryan, an analyst at JMP Securities. "The only reason for a somewhat subdued reaction today is that they pay something appears to be full price and the short term economics are modest in terms of needle moving. "
Meanwhile, CEO David Solomon at Morgan Stanley's rival Goldman Sachs was much more affected by restructuring the companies he already owns than by buying new businesses. The bank recently reshuffled the heads of its Asset Management and Consumer and Wealth Management divisions.
Their focus could soon change to growth through acquisitions, Ryan said. "Goldman Sachs isn't prevented from doing bigger things," he said. "I wouldn't be surprised if you took this route."