Fallout, no shelter

Coding goofs to result in more client losses at AXA Rosenberg

The mounting fallout from quantitative firm AXA Rosenberg Investment Management's recent admission that key managers didn't provide timely information about coding errors found last year in its computer models shows the perils of suffering fiduciary lapses during a stretch of weak performance.

“Quants are all suffering at the hands of the market, but AXA Rosenberg is the only firm being done in by its own scientists,” noted Donald H. Putnam, the San Francisco-based managing partner of investment bank Grail Partners LLC.

In an April 15 letter to clients and consultants, Global CEO Stephane Prunet and Americas CEO William E. Ricks conceded the coding errors — discovered in June and fixed by November — weren't reported “in a complete and timely manner by senior investment officers as required by the firm's policies.” Promising a full review, with outside experts called in to help determine the impact on investment returns, the executives noted that Barr Rosenberg, the firm's chairman, would take a 30-day leave while Thomas Mead, the director of the Barr Rosenberg Research Center, would leave within a year (Pensions & Investments, April 19).

Market watchers predict serious ripple effects — over and above the more than $600 million in client money pulled from the firm in the initial flurry of responses to its April 15 revelations.

Last week, the $142.8 billion Florida State Board of Administration, Tallahassee, became the latest — and most prominent — client to terminate AXA Rosenberg.

Spokesman Dennis MacKee said the board voted April 21 to terminate the firm from a $400 million domestic equity mandate awarded in 2008, following a “comprehensive evaluation of the situation.” He said those assets are being divvied up among existing managers.

Florida joins other public funds — including the $10.3 billion Montana Board of Investments, Helena, and the $1.6 billion City of Fresno (Calif.) Retirement System — in terminating the quantitative manager.

Montana terminated the firm from a $39 million active international equities mandate awarded in the second half of 2006, according to CIO Cliff Sheets. The Fresno fund reclaimed more than $100 million in a large-cap domestic equities mandate it had awarded in 2005.

Parent company AXA “is the victim here, even more so than the clients,” said Mr. Putnam. “In the end, it's likely we'll discover that the portfolio effects (of any coding errors) were minimal or nonexistent, but a fiduciary organization cannot easily cope with its investment leadership appearing less than forthcoming with the facts.”

The growing list of investment consultants urging their clients to terminate the firm lends support to that view.

Gatekeepers turning sour on the Orinda, Calif.-based money manager include Hammond Associates, NEPC, Rogerscasey Inc., Wurts & Associates Inc., Wilshire Associates Inc. and R.V. Kuhns & Associates Inc.


In an e-mailed message, Carla McGuire, director of research with St. Louis-based Hammond Associates, said her firm has “recommended redemption to our clients” using AXA Rosenberg, which had been an approved manager.

Steve Charlton, director of consulting services with NEPC in Cambridge, Mass., said the fact that internal procedures at AXA Rosenberg weren't followed in handling the coding error was one factor shaking NEPC's confidence in the firm. 

Other consultants indicate they're leaning in that direction.

Jack M. Marco, the chairman of Chicago-based Marco Consulting Group, the industry's leading consultant to Taft-Hartley union plans, said his staff will meet with AXA Rosenberg officials April 30 and then make a determination about the money manager early in the week of May 3.

AXA Rosenberg has been an approved manager for Marco, with roughly a dozen clients — including those who have outsourced investment decision-making responsibility to the consulting firm — using the money manager's international equity and domestic small-cap equity strategies, Mr. Marco said. The firm's lapse in judgment, in waiting months to inform clients about the coding error, has left Marco Consulting “very concerned” and inclined to take some action, although a final decision has yet to be made, he said.

Spokesmen or manager research executives for other investment consulting firms — including Mercer LLC, Hewitt Associates and Towers Watson — declined to comment on whether AXA Rosenberg's tardy revelations had altered their views on the money manager.

William Ricks, AXA Rosenberg's Americas CEO and chief investment officer, didn't respond to calls and e-mails seeking comment.

AXA Rosenberg spokeswoman Heidi Ridley, responding to a request to speak with executives to learn how the company was answering concerns, said in a e-mail that the firm's April 15 letter “amply describes what we are actively discussing with our clients.”

The money manager's rough performance in 2009, after holding up fairly well in 2008, could have been an added concern for the growing list of clients opting to end the discussion by terminating the firm.

For example, the firm's $14.4 billion all-cap U.S. Broad Market Equity strategy trailed its Russell 3000 benchmark by 9.2 percentage points last year, after a marginal 0.31 percentage-point lag in 2008.

Likewise, the firm's $6.5 billion large-cap International Equity strategy trailed its Morgan Stanley (MS) Capital International Europe Australasia Far East benchmark by 8.8 percentage points in 2009, after lagging by only 87 basis points in 2008 — a year when a number of other quant firms sustained more severe underperformance.

Market watchers say they'll be watching to see if the coding error brouhaha produces any organizational ripples in the money management firm.

For example, one executive recruiter who declined to be named said the independence of the Barr Rosenberg Research Center — a possible explanation for how the coding errors didn't come to the full attention of the AXA Rosenberg board for months — could be reined in going forward.

One investment banker who declined to be named said with both of its U.S. money management affiliates — AXA Rosenberg and AllianceBernstein (AB) LP (AB) — now going through rough patches, AXA SA may even consider combining the two to consolidate sales and executive management functions.