Worsening conditions: Staff cuts hit growth managers

As Nicholas-Applegate slashes 5% of its money management staff, some experts say industrywide investment layoffs are inevitable

SAN DIEGO - Growth specialists finally have begun to cut swathes of investment management staff in response to worsening market conditions.

Nicholas-Applegate Capital Management Inc. last week became the first institutional growth manager to announce significant layoffs that impact the investment management side of the business.

Until now, managers such as Fidelity Investments, Boston; Putnam Investments, Boston; Janus Investments, Denver; and State Street Research & Management Inc., Boston, all made slight cuts to investment personnel. San Diego-based Nicholas-Applegate laid off more than 5% of its investment management personnel - 18 people - as part of an overall 15% downsizing. In all, 49 of 328 employees received pink slips, with the majority cut from client service, marketing and back-office departments.

"We are trying to right-size the structure of the firm to fit the amount of assets we now manage," said Marna C. Whittington, president and chief executive officer. Nicholas-Applegate has less than $20 billion under management, down from a peak of more than $50 billion in the first quarter of 2000.

Ms. Whittington said the international, Pacific Rim and emerging markets teams were combined, as were the U.S. large-cap and midcap growth strategies.

Among the departed investment management staff are Andrew B. Gallagher, head of large-cap growth strategies; Randall S. Kahn, co-head of international equities and emerging markets; Thomas Bleakley, manager of the Global Technology Fund; Trisha C. Schuster, manager of the Global Healthcare Fund; Michael P. Carroll, a U.S. large-cap growth equity manager; Ernesto Ramos, an international and emerging markets equity manager and head of international structured equities; and Jessica L.G. Occhialini, an emerging markets equity manager. Also terminated were investment analysts David Fujisaki, international equities; Peter S. Moon, global health care stocks; and Rolf Schild, international equities.

Despite the layoffs, Nicholas-Applegate is searching now for someone to head the newly combined non-U.S. equity team, which is being overseen temporarily by Horacio A. Valeiras, chief investment officer. The firm also is searching for a team leader for the domestic and international quantitative unit to replace John Kane, who retired last year. Mark Stuckelman, head of value equities, is the interim head of quant strategies.

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Michael Rosen, a consultant at Angeles Investment Advisors LLC, Santa Monica, Calif., said the layoffs at Nicholas-Applegate are justifiable. "It's unusual to see cutbacks at the senior portfolio management level, but Nicholas-Applegate is rationalizing ... going from having many co-heads of strategies to eliminating duplication. There's a difference in this kind of layoff than in those at very large Wall Street firms, where the cuts are in ancillary positions."

Market watchers said it might be a little soon to say whether other growth managers will begin to cut deeply into asset management areas. However, strategic cuts are likely at many firms to eliminate duplication. Companies also will replace existing staff with more qualified portfolio managers and business managers, consultants said.

"Any baby bull could have done well when the market was going like gangbusters a couple years ago, but during markets like this, they need extremely skilled and experienced managers to manage the portfolios and run the business," said executive recruiter Glenn M. Buggy, managing director at Whitehead Mann Inc., New York.

Cuts in some investment management departments are inevitable, said Robert G. Burke, U.S. practice leader of Mercer Manager Advisory Services, New York. But any terminations are unlikely to be as rampant as the 10% to 20% cuts companies are making in back-office and client service areas.

"This is a new phenomenon for asset managers, but people are beginning to make choices about how to allocate their scarce compensation dollars. They are getting out of businesses where they don't have scale, like 401(k) record keeping. You can't have 25 break-even products in this environment. You have to make choices," Mr. Burke said.

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By way of example, Alexandra Trower, a spokeswoman for J.P. Morgan Fleming Asset Management, New York, confirmed reports that some layoffs will take place at her company, and some portfolio managers and analysts might be affected. "Markets have contracted, so we may do some right-sizing," she said.

And plenty of other managers will continue to perform surgery outside their investing functions, consultants predicted.

MFS Investment Management, Boston, last week announced staff cuts of 110 people, or 4% of its work force, said John Reilly, director of corporate communications. Centralization of some operations, administrative and marketing functions, mainly on the retail side, eliminated duplicate jobs and excess capacity and increased efficiency. Mr. Reilly said investment management staffers were not affected. MFS had $123 billion in assets as of June 30, down from $137 billion at the beginning of 2002.

A smaller growth manager, Oak Associates Ltd., Akron, Ohio, in September laid off 14 of its 63 employees. All were from administration and marketing, said Howard Monahan, a spokesman. Assets at Oak Associates total about $8 billion, down from $15 billion at the beginning of the year.

The cuts at Oak Associates corrected an ill-timed jump into the retail mutual fund market, said Scott B. Harsh, president and chief executive officer of consultant Fund Evaluation Group Inc., Cincinnati. "I think some of the cutbacks we're seeing in the market are coming from institutional managers who ramped up to serve the retail market," he said.

Recruiter George Wilbanks, managing director of Russell Reynolds Associates Inc., is less pessimistic about industry prospects than many. "It's not all gloom and doom, because even though the equity markets have dropped 20% this year, revenues haven't. This industry doesn't run on 2% to 3% margins. It runs on 40% to 50% margins. Even index managers run between 20% and 25% margins. In every firm I can think of that is announcing layoffs, they also are hiring in specialized, key areas."