Management's discussion and analysis
Asset Management
The John Nuveen Company
We hold a 78% interest in The John Nuveen Company (Nuveen), which comprises our asset management segment. Nuveen's core businesses are asset management; the development, marketing and distribution of investment products and services; and municipal and corporate investment banking services. Nuveen sponsors and markets open-end and closed-end (exchange-traded) managed funds, defined portfolios (unit investment trusts) and manages individual accounts. Nuveen also provides municipal and corporate investment banking services and underwrites and trades municipal bonds.
The following table summarizes Nuveen's key financial data for the last three years:
(In millions)
Year ended December 31
1997
1996
1998
Revenues
$
308
$
269
$
232
Expenses
171
146
114
Pretax Earnings
137
123
118
Minority Interest
(33)
(30)
(26)
The St. Paul's share of pretax earnings
$
93
$
92
$
104
Assets under management
$
55,267
$
49,594
$
33,191
Nuveen's revenues in 1998 increased 14% over 1997, primarily due to growth in asset management fees. The increase in those fees resulted from a higher level of average assets under management during 1998 due to the acquisition of Rittenhouse Financial Services in August 1997, and new product sales during the year. Rittenhouse, an equity and balanced account management firm serving affluent investors, added $9 billion to Nuveen's managed assets at acquisition. The 16% increase in expenses over 1997 reflects goodwill amortization and the expected incremental operating expenses resulting from the Rittenhouse acquisition.
Nuveen's gross product sales totaled $7.8 billion in 1998, compared with $3.0 billion in 1997. Additions to managed accounts provided the majority of the increase over 1997. Volatility in equity markets during 1998 contributed to a $600 million increase in Nuveen's mutual fund sales for the year, as investors sought to deploy their funds in more conservative investments. Nuveen's net flows (equal to the sum of sales, reinvestments and exchanges less redemptions) totaled $5.7 billion in 1998, compared with $1.8 billion in 1997.
Assets under management at the end of 1998 consisted of $26.2 billion of exchange-traded funds, $16.4 billion of managed accounts, and $12.7 billion of mutual funds. The $5.7 billion increase in managed assets since the end of 1997 was primarily due to the increase in managed account and mutual fund sales during 1998 and growth in the market value of underlying investments. Municipal securities accounted for 71% of managed assets at the end of 1998, with the remaining 29% consisting of equity securities.
Nuveen repurchased 732,700 common shares from minority shareholders in 1998 for a total cost of $27 million. Nuveen also made significant share repurchases in 1997 and 1996, which were proportioned between our holdings and minority shareholders to maintain our ownership percentage in Nuveen. Our proceeds from Nuveen's repurchases were $41 million and $74 million in 1997 and 1996, respectively. Nuveen's $147 million acquisition of Rittenhouse in 1997 was funded through cash on hand and borrowings under a committed credit line, which were subsequently paid down in the first quarter of 1998. Virtually all of the Rittenhouse purchase price consisted of goodwill, which is being amortized over 30 years.
1997 vs. 1996 - In 1997, Nuveen's pretax earnings increased $5 million over 1996. The 16% growth in revenue in 1997 was driven by an increase in investment management fees resulting from managed assets acquired during the year. In January 1997, Nuveen acquired Flagship Resources, Inc. for approximately $72 million, which added over $4 billion to assets under management. The addition of Rittenhouse in August 1997 added $9 billion to Nuveen's managed assets.
Demand for Nuveen's traditional municipal investment products suffered in 1997 due to competition from strong equity markets and investor concerns about the global economy and interest rate trends. Expenses were 28% higher than in 1996, reflecting the impact of the two acquisitions, as well as increased advertising and promotional expenses associated with the launch of new equity and balanced mutual funds early in 1997.
Outlook for 1999 - As a result of investments made over the last two years in new products and services, we expect Nuveen's current sales momentum to carry into 1999. Nuveen will continue to focus on meeting the needs of financial advisers working with affluent investors by leveraging its long heritage of investment expertise through a wide array of investment vehicles.