MONEY MANAGEMENT

1838 closes quietly after returns and assets drop

KING OF PRUSSIA, Pa. — 1838 Investment Advisors LP, a money manager with a long history and more than $14 billion under management at its peak, closed at the end of June, industry sources said.

Plagued by weak performance, the company's assets under management had fallen to $3.6 billion by March 2004, when a management team and Orca Bay Partners, a Seattle-based private equity firm, bought out the company from its parent, MBIA Inc.

Assets continued to hemorrhage under the new owners. With wrap-fee plan providers — including Smith Barney Citigroup, Legg Mason (LM), Prudential Investments and LPL Financial — dropping 1838 from their manager lists and institutional clients bolting, the money manager had well under $2 billion when it pulled the plug, industry watchers said.

Ross K. Chapin, a managing director with Orca Bay Partners who became chairman of 1838 Investment Advisors following the management buyout, declined to comment on reports the money manager had closed.

Orca Bay's website still lists 1838 as one of the private equity firm's portfolio companies, but calls to the King of Prussia-based company's listed telephone number go unanswered, and its website no longer functions.

Most recently, Morgan Stanley (MS) Investment Management announced July 28 that it had hired Hans van den Berg and David Sugimoto and become interim adviser of the mutual fund the pair manages, the $22.7 million 1838 International Equity Fund. A Securities and Exchange Commission filing listed Mr. Van den Berg as president of 1838. He was basically "the guy that turned the lights out," said one 1838 veteran, who declined to be named. Messrs. Van der Berg and Sugimoto were not available to comment.

Fund terminations

Executives at the $112 million Sarasota Police Officers' Pension Fund, Sarasota, Fla.; the $330 million Longshoremen, Hampton Roads Shipping Association, Norfolk, Va.; and the $466 million Steamfitters, Local 420, Philadelphia, said they terminated the money manager over a year ago. The $96 million MacSteel Service Centers USA pension fund terminated 1838 from a $32 million active domestic equities mandate in February 2004, just before the new ownership team came in.

Another SEC filing showed the board of trustees of 1838 Investment Advisors Funds, at a June 13 meeting, voted unanimously to liquidate the firm's $16 million 1838 Fixed Income Fund. On June 10, the board of directors of the $92 million closed-end 1838 Bond-Debenture Trading Fund announced 1838 Investment Advisors had resigned as adviser, with MBIA Capital Management Corp. taking its place.

Money managers in the Philadelphia area called the quiet disintegration of 1838 Investment Advisors almost eerie.

"The silence has been deafening," said one money management executive in the region, who declined to be named. It's as if they "fell off the face of the earth," said a pension consultant, who asked to remain unidentified.

One private equity veteran, who declined to be named, said it's unusual for a firm with such a long history to simply disappear. The firm traced its lineage back to Drexel and Co., a banking and investment management firm founded by Francis Drexel in Philadelphia in 1838.

A long stretch of weak performance might have left 1838's new owners with only the narrowest window of opportunity to turn things around, observers said.

Wrap-fee losses

An executive at one wrap fee provider whose company dropped 1838 from its manager list during the past six months said the firm had frequent ownership and staff changes, stayed on the growth stock bandwagon too long and then switched gears at the wrong moment. Executives of at least 10 brokerage firms with wrap fee programs cited on 1838's ADV form said they parted company with the money manager during the past two years.

According to separate account performance data supplied by Morningstar Inc., the firm's leading large-cap equity strategy trailed its benchmark, the Standard & Poor's 500, on a one-, three-, five- and 10-year basis. For one-year periods ended March 31, the strategy missed its benchmark by 5.8 percentage points in 2001 and 9.4 percentage points in 2003. In 2004, the first year under the new owners, the underperformance was nearly 2.9 percentage points. And for the 12 months through March 31, 2005, the strategy underperformed the S&P by 3.4 percentage points.

Its 1838 Fixed Income fund also lagged its benchmark — the Lehman Brothers Aggregate — on a one-, three- and five-year basis.

1838's last chance for a turnaround appears to have fallen apart fairly quickly. At the end of March 2004, Orca Bay said it would back a management team — led by Joseph T. Doyle Jr., chief investment officer, and John Springrose, who was managing director and head of sales — in a buyout from MBIA. The private equity firm tapped Richard D. Hughes, an executive who had worked with Radnor, Pa.-based Rittenhouse Asset Management Inc., as chief executive officer. Tim Carver, an Orca Bay executive, was also brought in.

By September, Mr. Springrose had left. In a telephone interview, he called his departure "amicable" — a reflection of the fact that his strengths and weaknesses closely matched those of Mr. Hughes.

By the end of 2004, however, Mr. Hughes was gone as well. Reached by e-mail, he deferred questions to Orca Bay's Mr. Chapin.

Sources said the scale of departures by both high-net-worth and institutional clients simply caught 1838's new owners by surprise. While an ownership change often prompts some clients to pull assets, the degree to which outflows accelerated after the deal proved worse than the new team had hoped, said Mr. Springrose.

Litigation rumored

Industry watchers said it is unclear where Mr. Carver is working now, but he hasn't returned to Orca Bay. He didn't respond to phone messages. Reached by telephone, Mr. Doyle declined to comment.

Industry sources say Orca Bay might be mulling litigation against MBIA over the 2004 transaction. Mr. Chapin declined to comment. MBIA, in a statement, said: "We are not aware of any lawsuit."

Mr. Springrose said he has no knowledge about such prospects. "I really hope that everybody can just put this behind them. It's just a bad experience."

Competitors aren't gloating. "It's a sad story: 1838 was a great Philadelphia firm," said Samuel H. Ballam III, a partner with Philadelphia-based Cooke & Bieler LP.

There are "no evil-doers" in this story to pin the blame on, said another source familiar with both Orca Bay and 1838, who declined to be named. "It's like the death of an old friend."