Lucrative private banking is offsetting some of the misery suffered by financial conglomerates as they lose funds from their retail asset management divisions, says Morgan Stanley in a new research report, which also argues that wealth managers have a two-year opportunity to exploit troubles at the biggest firms such as UBS.

Its conclusions chime with a raft of recent second-quarter results of banking groups, often showing that only wealth management saw an increase in profits compared with the same period a year ago.

“We view private banking as attractive with sticky long duration assets and decent top-line growth potential, especially for those able to access pockets of growth (such as emerging markets) and to capitalise on the difficulties of some of the larger integrated houses,” analysts Huw van Steenis, Hubert Lam and Brian Hamilton said in a note on European financials.

“We continue to think that it could be two years for UBS and other majors to return to vibrant private banking growth, offering opportunities for competitors,” the note said.

As a result, the outlook is bullish for private banks such as Sarasin, EFG, Julius Baer, as well as Credit Suisse, Switzerland’s second largest bank, the note said. Alternative investment houses such as Man Group, the UK listed hedge fund business, Partners Group, and GLG, also have favourable outlooks, Morgan Stanley said.

In contrast, Morgan Stanley said it has no overweight recommendations on traditional asset management houses, as such long-only managers have suffered heavy withdrawals of client cash amid the equity market downturn, while providers of absolute return products are, if anything, seeing even stronger inflows from investors seeking to protect wealth.

To illustrate the scale of investor fear, Morgan Stanley said that European clients pulled a total of $115 billion from mutual funds in the first half of 2008, with significant pullouts coming from Spanish and Italian investors.

Morgan Stanley said its prediction that investment management will polarise into a “barbell shape” – high added value funds on one end, and cheap index trackers at the other – continued to hold good. It said the enthusiasm for low-cost index tracking products such as exchange traded funds was bullish for firms such as Lyxor, part of Societe Generale, and Barclays Global Investors