New leader must stanch equity outflows in market not favoring value
The new CEO of Brandes Investment Partners LP has a challenging assignment: show that the deep value equity money manager can produce positive returns and reverse five years and tens of billions of dollars in net outflows.
Brandes announced last week in a client letter that longtime CEO Glenn Carlson would be stepping down for “personal and professional reasons.” Mr. Carlson will be replaced on Feb. 1 by Brent Woods, the managing director of investments and a 17-year Brandes veteran.
Poor performance in its two largest strategies — international equity and global equity — fueled the big outflows. Assets under management at the San Diego-based firm plummeted to $29.8 billion as of Sept. 30, from $111 billion at the end of 2007, according to information from investment data provider eVestment Alliance, Marietta, Ga., and Brandes.
The markets have been unkind to value managers like Brandes since the financial crisis. In 2008, Brandes' AUM declined more than 50% to $52.9 billion. The slide has continued though 2012, although the pace has slowed.
The CEO change is unrelated to the drop in assets and was requested by Mr. Carlson, said Oliver Murray, managing director, portfolio management and client services, in an interview.
Mr. Murray said the company's succession plan involves several months of transition to ensure a smooth changing of the guard. Mr. Carlson will remain as one of 21 partners and a member of Brandes' investment oversight committee, Mr. Murray said.
“There is nothing surprising in this,” he said. “This is a normal evolution of our business.”
Top management changes at Brandes are rare. Mr. Woods will be only the third CEO in the privately held company's 38-year history. Charles Brandes, the founder and chairman, held the title until 2002, when Mr. Carlson took over.
Messrs. Brandes, Carlson and Woods declined requests for interviews.
The management change will not affect the firm's deep-value investment philosophy, Mr. Murray said.
“We believe that value investing really always wins, but there are cycles, and it takes a lot of discipline when you are in the down cycle like we've been in recently,” he said.
Brandes does not release revenue or profit numbers, but Mr. Brandes appears on several published lists of the richest Americans due to the financial success of his firm. Along with the decline in assets under management, 40 of Brandes' 431 employees were laid off in 2011.
Some investment consultants said they believe Brandes' investment philosophy is solid, despite the investment challenges of the past several years.
“We have a lot of respect for the organization,” said Michael Rosen, principal and chief investment officer for Angeles Investment Advisors LLC, Santa Monica, Calif. “They have a disciplined investment process and very experienced people.”
John Wasnock, senior research associate with consultant Wurts & Associates in Seattle, said while Brandes cut staff last year, it left the investment staff intact, a positive for the firm, as is making Mr. Woods the CEO. “It's a better fit culturally to bring in someone who knows the organization and has been there as a managing director,” Mr. Wasnock said.
But not all consultants are on board. One, who would only speak under the condition that his name not be used, said his firm overall has strong respect for the Brandes investment process. But, he added, consultants there no longer recommend that clients invest in Brandes' large-cap flagship international and global equities strategies because they have underperformed.
Brandes' biggest strategy, its $14.7 billion active international large-cap value, suffered net outflows of $2.9 billion in 2011 and $1.4 billion this year through Nov. 5, according to eVestment Alliance. The strategy has underperformed the MSCI Europe Australasia Far East index over one, three and five years, Brandes data show.
The strategy returned 8.94% for the year ended Sept. 30, vs. 13.75% for its benchmark. For three years, the strategy returned an annualized -0.28%, vs. 2.12% for the MSCI EAFE. Over five years the Brandes strategy returned an annualized -5.64%; the benchmark returned -5.24%.
Brandes' second-largest strategy, the $9.3 billion global value equity, returned 15.27% for the year ended Sept. 30 while its benchmark, the MSCI World index, returned 21.59%. For three years, the global strategy earned an annualized 4.1%, vs. 7.48% for the benchmark. For five years, the Brandes strategy returned -6.97% and the benchmark, -2.15%.
The international and global equity strategies combined make up about five-sixths of Brandes' assets under management.
Brandes' Mr. Murray said he is confident that the firm's commitment to deep value investing will bring rewards to investors in the future.
Some smaller Brandes strategies have done better.
The $366 million international small-cap value equity strategy had a 14.21% return for the year ended Sept. 30; its benchmark, the Standard & Poor's Developed ex-U.S Small Cap index, returned 14.06%. The strategy returned a compound annualized 8.48% for three years, vs. the benchmark's 5.67%. For five years, the strategy's annualized return was 2.32%, vs. -3.17% for the index.
While Mr. Murray said Brandes is committed to sticking with its investment process, the company plans a major change to its six-member large-cap value stock selection committee.
Effective Feb. 1, one five-member committee will choose stocks for the international equity portfolio; another five-member committee will choose them for the global portfolio.
Four smaller international, global and U.S. strategies will be split between the two committees.
Mr. Woods, who is now on the large-cap committee, will sit on the international equity panel, but not on the global equity one.
Mr. Carlson, also a member of the current, single committee, will no longer be part of the stock selection process.
The committee managing the international strategy will have two new members from the company's investment staff, while the new global committee will have three new members
Mr. Murray said a decision on whether a new managing director for investments will be appointed to replace Mr. Woods will be made after Mr. Woods adjusts to his new role.
Mr. Woods has a big job ahead of him.
Trustees of the $37.5 billion Illinois Teachers' Retirement System, Springfield, last month approved terminating Brandes, the latest in a long line of terminations. The firm had run $685 million in international large-cap value equities for the pension fund.
One of Mr. Woods' first client visits since the announcement of his new role will come this week when he meets officials from the $10.3 billion Teachers' Retirement System of Oklahoma in Oklahoma City. The fund put Brandes on its watch list in March 2011, citing performance of the large-cap international portfolio, in which it has $364 million invested.
“We are very concerned about their performance” James Wilbanks, executive director, said of the meeting, which was set up before Brandes' management changes were announced. “We need to know what is going on.”
Brandes has managed money for the pension fund since 1996, he said.
The $5.1 billion San Diego City Employees' Retirement System placed Brandes on its watch list in September 2011 because of concerns of underperformance for its $189.8 million international value equity portfolio, according to a staff report from the system's Sept. 7 meeting.
The report recommended Brandes be evaluated over longer market cycles and that the firm continue to be monitored. The pension fund hired Brandes in June 1995, according to the report.
The $750 million Newport News (Va.) Employees' Retirement Fund also cited underperformance among its reasons for terminating Brandes in April, said Tom Mitchell, the city's finance director. Brandes had run $20 million in international equities for the fund.
Newport News officials wanted to reduce the fund's international equity exposure because of concerns about the eurozone and other issues overseas, Mr. Mitchell said. It was an easy choice to pick Brandes to cut because of its performance, he said: “They were hanging out in the bottom quartile.”
This article originally appeared in the November 12, 2012 print issue as, "Brandes CEO has hard job ahead".