Bank of New York Mellon, under immense pressure from shareholders to strengthen its bottom line, has been boosting its investment management business, specifically in fixed income.
BNY Mellon recently launched a new firm specializing in mortgage credit, Amherst Capital Management. It is a joint venture with Amherst Holdings and majority-owned by BNY subsidiary Standish Mellon Asset Management, according to Curtis Arledge, chief executive of BNY Investment Management.
The new firm has been established "at a time when investors are looking for strategies that can generate income, but also offer strong risk-adjusted total returns," Arledge said. It is based in New York and will be staffed up significantly this year.
BNY Mellon is seeking to deepen its fixed-income offerings, and its latest move reflects demand from private clients to gain access to U.S. real estate. The bank weathered brutal shareholder criticism last year over stalled revenue growth, and it grew this March when Marcato Capital Management became the second shareholder to call for shake-ups at the bank. Late last year, another activist investor, Trian Fund Management, pressed bank executives until it gained a seat on the board. Marcato went further, calling to oust CEO Gerald Hassell.
Amherst Capital Management will invest primarily in commercial and residential mortgage credit, said Amherst Holdings CEO Sean Dobson, who will lead the new firm. Looking ahead, Dobson said there is clearly opportunity in direct lending. That could include propping up a retail originator, he said.
"We want all of it," he said. "Residential and commercial mortgage markets have a market cap twice the size of the S&P 500. We'll look at anything from real estate equity to mortgage-backed securities."
Amherst has also recruited the state of Texas as a major investor. Texas Treasury Safekeeping Trust has invested $250 million in the BNY Mellon and Amherst partnership. The trust manages $57 billion in assets for the state, including investments for thirteen endowments.
"School districts and cities are cut down by low rates," said Texas Trust CEO Paul Ballard, explaining that the state usually avoids big engagements that would be difficult to wind down in a crunch. "Generally speaking, we favor managers with smaller-size funds. BNY is big, but Standish approaches things with a smaller view, and that reassures us," Ballard said.
Standish, one of BNY's 13 investment arms, is the bank's fixed-income unit in the U.S.
The trust's ties with Amherst Holdings, both based in Austin, go back at least two decades. Amherst has long functioned as a broker-dealer for Texas Trust, and it has a history of seeding new funds, like the one it is backing with BNY Mellon.
Texas has seeded three funds for Amherst in recent years: one to invest in legacy subprime mortgage-backed securities, one to acquire distressed single-family properties and flip them into rental homes, and another that bet on loan pools tied to mortgage-litigation settlements.
BNY Mellon, which manages $1.7 trillion in investments, has made other commitments in recent months that signal it is expanding its fixed-income offerings.
In January it acquired the fixed-income asset manager Cutwater Asset Management, a $22 billion-asset subsidiary of the municipal bond insurer MBIA. Cutwater will support one of BNY Mellon's European asset managers, Insight Investment, according to BNY's most recent annual filing.
Fixed income made up $222 billion, or 13%, of the bank's assets under management at Dec. 31, filings show. That figure was basically unchanged from a year earlier. BNY's new ventures are expected to benefit the investment management group, which generated fees of $3.4 billion last year and about the same amount in 2013.