Billionaire investor Nelson Peltz's Trian Group called for change at custody bank State Street Corp and suggested the company should consider spinning off its investment management business in order to unlock value.

The activist investor said that if State Street fails to make progress, Trian may decide to become significantly more active.

We believe State Street's low multiple is also a referendum on the management's performance, the board's oversight and the market's lack of confidence in the company's strategy and level of execution, Peltz said in a letter to State Street's board on Sunday.

Trian owns about 3.3 percent of the outstanding shares of State Street, the world's third-largest institutional investor.

State Street said in a statement that it has engaged in constructive discussions with Trian over the past year.

With the approval of the Federal Reserve and within the context of growing our business, we intend to continue to return capital to our shareholders, the company said.

Peltz and his other Trian founding partners said that State Street has significantly underperformed other banks due to inadequate cost management, poor capital allocation decisions and repeated nonrecurring charges.

He suggested the company should consider splitting its investment management and investment servicing businesses, set long-term earnings margin targets for the company and prioritize returning capital to shareholders by buying back more stock.

INDEPENDENT DIRECTOR

Trian also suggested that State Street Chief Executive Jay Hooley should drop his additional position of chairman and put an independent director into that role.

According to the letter, Trian has been talking to State Street management for more than a year.

Trian said that State Street's board had already considered and dismissed spinning off its State Street Global Advisors (SSgA) asset management business because of concerns that there was too much overlap between the investment management and investment servicing businesses.

Trian said it believes these concerns are overstated and that both units could thrive as stand-alone public companies.

Shares of State Street closed at $33.90 on Friday, down more than 30 percent from January. Trian said it believes the company's implied target value could be $99 per share in 2014.

Peltz has in recent years pushed for change at consumer companies ranging from ketchup maker H.J. Heinz Co to fast-food chain Wendy's and luxury jewelry retailer Tiffany & Co .

(Reporting by Michael Erman in New York; Editing by Muralikumar Anantharaman)

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