Building a better American Century

Jonathan S. Thomas took the helm at American Century Investments as president and CEO roughly half a year before the wheels began falling off the global financial bus. His goal — to diversify a company whose focus on U.S. growth equity mutual funds left it exposed when the technology bubble burst in 2000 — may have been inspired by the rearview mirror, but it ultimately left American Century better positioned for the trials to come. The plan Mr. Thomas executed, expanding the firm's fixed-income capabilities, adding international offerings and putting an institutional focus on American Century's business, served the company well during the decade's second and deeper crisis between mid-2007 and early 2009. In 2010, American Century enjoyed record net inflows of $6 billion, with that momentum continuing this year.

Snapshot

Earl Richardson

Jonathan S. Thomas

• Current position: president and CEO of American Century Investments, Kansas City, Mo.
• Assets: $107.2 billion as of Aug. 31
• Employees: approximately 1,300
• Age: 48
• Education: MBA from Boston College, B.A. in economics from the University of Massachusetts at Amherst
• Personal: married, three children
• Hobbies/interests: travel, reading, family adventures
• Performance (for periods through Sept. 30):
  AC Global Growth strategy
  • One year: -2.6% Benchmark: -4.4%
  • Three years: 1.6% Benchmark: -0.1%
  • Five years: 1.1% Benchmark: -2.2%
  AC Non-U.S. Growth strategy
  • One year: -8.8% Benchmark: -9.4%
  • Three years: 1.2% Benchmark: -1.1%
  • Five years: -0.4% Benchmark: -3.5%
  American Century Value Equity
  • One year: -0.9% Benchmark: -2.2%
  • Three years: 1.3% Benchmark: -1.6%
  • Five years: -1.0% Benchmark: -3.5%
• Benchmarks, respectively: MSCI World-ND; MSCI EAFE-ND; Russell 3000 Value

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Was the firm you took over in March 2007 well positioned to roll with the punches that began coming soon thereafter? I was brought in as part of a deliberate succession planning process. The owners recognized that the company had underperformed for a period of time. It was my mandate to set a new course from where we had been historically.

Did you have detailed marching orders? No, they really left it up to me. My objective — a growth strategy, growth through diversification. You know, anything in life that you're good at, you risk overdoing. American Century Investments was exceptional at domestic U.S. growth equities, sold primarily to retail investors. We immediately set a course towards diversifying — to smooth out the earnings volatility of the firm, (which is) important really to the client. The notion of diversification allows us to reinvest in the business knowing that we'd be able to stick through it through various market cycles.

Did you have specific goals? Yes, first and foremost, we really wanted greater fixed-income capabilities (to) serve as a shock absorber in times of difficulty. In 2005, I think we had 24% fixed income. Today we're around 36%. We wanted to change (the mix of) clients, to increase flows from institutional clients because if a particular asset class is rising, institutional clients tend to sell that down to maintain a disciplined asset allocation mix, while retail clients tend to buy more of it. And then the other thing of great interest to us was to have increased international exposure, mostly on the institutional side as well. We're way ahead where we thought we'd be — (with) $6 billion or so (for the firm's international business), which just launched in earnest in 2008.

Hasn't the institutional-retail gap narrowed as advisers and gatekeepers bring more sophistication to the retail side? The gap between institutional and retail has closed significantly. The way we've chosen to address that is to calibrate everything in the organization to institutional standards — the most demanding channel. They're the most focused on process, (the) most demanding on reporting. Our belief is pretty simple: if you win in the institutional channel, that should trickle down into the retail channel, which has become increasingly institutional.

Of course, there's also talk now of institutional investors becoming more dynamic, to avoid another 2008-style downdraft. The big buzz today is where do you put your money. The way we see it, it's always about diversification (but) the thing that's changed in recent years is what diversification means now isn't just about stocks and bonds. Increasingly, it's about low correlation assets as well. I personally believe that following '08-'09, clients are very interested in getting access to those low correlation assets, but they want them from organizations that are regulated, they want transparency, liquidity, daily pricing. So increasingly, you see a shift from the more opaque providers to more transparent providers.

What can American Century offer in that department? We have a variety of things — the traditional low correlation stuff: gold, real estate, a market-neutral product, a strategic inflation product. We're rolling out a global tactical asset allocation product that I think will be quite different than the ones that are out there already.

So, you're where you want to be when it comes to low-correlation products? We have $103 billion (in assets under management) today; we probably have $2 (billion to) $3 billion in the low-correlation space. I'd like to see that closer to 7(% to) 10% of our portfolio over the next five years.

You've described American Century as “extremely institutional” but mutual funds still account for the bulk of your assets. How much of the record net flows of $10 billion you've reported since the start of 2010 have been institutional? Our AUM today is a function of history. We're probably a third institutional, a third intermediary and a third (direct) retail. If you look at our flows for the last five years, it's just over half on the intermediary side and just under half tends to be institutional money.

How has founder Jim Stowers' decision to park a 45% chunk of the firm's equity in the Stowers Institute for Medical Research affected the company? It affects our culture. There's a certain type of person who's attracted to work in a company that drives 45% of its profits to medical research. If you came to Kansas City, you would sense a culture that is unique and powerful, in no small part due to the philanthropic dimension of what we do.

As laudable as that is, does it handicap your ability to hire and retain the best people? No. In 2007, we adjusted the compensation system to more closely align the incentives for the investment management people with our clients and our owners. We compensate them with a much larger portion of equity than we used to. We were around 5% employee ownership in 2005, and we've gone up to the 14% to 15% range now. There are 1,300 employees, of which 200 are investment people, and everybody in the company is an equity holder.

What has Canadian Imperial Bank of Commerce's recent purchase of J.P. Morgan Chase & Co.'s 41% stake in American Century meant for your firm? We're pretty excited about it. When we started working with J.P. Morgan, we were very retail, they were very institutional, (but as both firms broadened their businesses) we found ourselves bumping into one another, so our goal (was) to find somebody who didn't compete with any of our existing clients (including our distributors.) CIBC is a very long-term holder. In addition, their banking laws (in Canada) protect them from being taken over, so we're not going to find ourselves with a partner we didn't choose.

J.P. Morgan has filed a lawsuit against American Century over that sale. J.P. Morgan has filed a highly redacted lawsuit, alleging that certain information wasn't provided to the company that does our pricing. We really believe the case is without merit. I think the answer here is to get that unredacted, to let the world see what's really going on.

— Contact Douglas Appell at dappell@pionline.com