Morgan Stanley (NYSE:MS) stock has advanced more than 35 percent this year to date, more than doubling the return of the S&P 500 and outperforming the broader Financial Select Sector ETF (NYSEARCA:XLF), which is up about 20 percent for the same period. Much of this success can be attributed to Chairman and CEO James Gorman, who has helped shift the focus of the bank away from typically volatile trading and banking businesses and toward more reliable wealth management businesses.
Most recently, this transition has looked like Morgan Stanley backing away from the commodities business, which is a strategy fashionable among major financial institutions right now. Public scrutiny over the issue of physical commodities trading and ownership, as well as involvement in energy utilities, by financial institutions has put additional pressure on those businesses. Alleged abuse in the aluminum market was thrust into the spotlight by a New York Times article focusing on Goldman Sachs’s (NYSE:GS) ownership of warehouses.
Pressure on the financial industry has increased since the financial crisis and the recent allegations have helped refine the focus of regulation. The Federal Energy Regulatory Commission and the Commodity Futures Trading Commission have launched investigations not just into physical commodities trading but also alleged energy-market manipulation by firms such as JPMorgan (NYSE:JPM), who recently agreed to pay $410 million in penalties to settle accusations.
The increasingly dense regulatory environment combined with cyclical and secular economic headwinds have prompted banks like Morgan Stanley to pursue the closure of some of its businesses in the energy and physical commodities area. The firm recently announced that it would cut 10 percent of its staff from its commodities units.
Because of this, Morgan Stanley has announced that it will cut 10 percent of its staff — and 30 people — from its commodities unit and pursue the closure of some of its businesses in the area. The firm was reportedly engaged in talks with the Qatar Investment Authority last year to buy a unit, but negotiations apparently fell through.
At the same time, the firm is reorganizing the units it plans to keep. Morgan Stanley’s head of commodities market has left the bank, and the reporting relationship between salespeople and traders at the commodities division is changing. The firm hopes to make the division more efficient by making traders and salespeople work more closely together than before.
The reorganization comes as revenues in the area decline. Overall commodities revenue from major financial institutions has been cut in half over the past five years and many investors are pulling money from commodity funds.