Pioneering quant firm being merged into QS, a new Legg Mason unit
Legg Mason (LM) Inc. (LM)'s acquisition of QS Investors LLC spells the end of Batterymarch Financial Management Inc., the 45-year-old Boston-based quantitative equity manager that many saw as a pioneer in its field.
Through this deal, Batterymarch — formed in 1969 and purchased by Legg Mason in 1995 — and another Legg subsidiary, Legg Mason Global Asset Allocation LLC, will be integrated into QS Investors and use the QS name. New York-based QS also is a quantitative equity shop.
For many former Batterymarch executives, it's a bittersweet end of an era. In particular, co-founder Dean LeBaron told Pensions & Investments he is “saddened” to hear the name will disappear.
“When I sold Batterymarch to Legg Mason, I assumed I was selling something that would continue on beyond me,” said Mr. LeBaron, 80, who left Batterymarch when he sold it to Legg Mason and is now CEO of his personal investment firm, Virtualquest Co., in a telephone interview.
He co-founded the firm with Jeremy Grantham, now co-founder and chief investment strategist at Grantham Mayo & van Otterloo LLC, and Richard Mayo, co-founder and chairman of Mayo Capital Partners LLC, both in Boston. Mr. Grantham declined to comment; Mr. Mayo did not return a phone call seeking comment.
Said Lawrence S. Speidell, a former portfolio manager at Batterymarch and now chief investment officer of Frontier Market Asset Management, La Jolla, Calif.: “I think Batterymarch represents a milestone that was so far ahead of the path that most investors were taking. That milestone represented the first quantitative investment approach, the invention of basket trading. It represented the best of our industry.”
For Mr. Speidell, who worked at Batterymarch from 1984 until 1994, the company was more than a quant business. He remembered Mr. LeBaron taking potential clients to China and Latin America to see what was happening in those emerging markets. He recalled Mr. LeBaron and AT&T Investment Management Corp. CEO Robert Angelica going to Moscow in 1991, when Mr. LeBaron was contemplating launching a Soviet fund.
“Dean was always looking for the next idea. He was really obsessed with doing things differently,” Mr. Speidell said. “When index funds reached their general popularity, Dean abandoned them. When he felt that markets were more efficient, he developed an international strategy.”
Mr. LeBaron himself said: “I would prefer to be first than best.
“First was easier to select. We were always looking to fill that unfilled niche.”
“Batterymarch was a pioneering firm in the quant era,” said Michael J. Clowes, retired editor of P&I and now editor at large. “It's unfortunate that it'll be no more. It's a part of history.”
Mr. Clowes noted Batterymarch was one of the first independent investment counseling firms in the industry, and Mr. LeBaron was part of the avant-garde in predicting the essential role computers would play in the industry.
“In the 1970s, Dean was way ahead of the way most people thought about computers and technology,” he said, remembering a presentation Mr. LeBaron gave at a P&I conference that decade, using a computerized voice to emphasize his point.
Claudio Brocado, a Batterymarch senior portfolio manager from 2005 to 2013, said in an e-mailed response to questions that he thought the firm had “a wonderful culture.” He said it was a “well-oiled machine” and it's a “pity to let it all go away.”
Reducing number of brands
Legg Mason (LM) CEO Joseph Sullivan said in a telephone interview that although it was a difficult decision, executives chose to fold Batterymarch and LMGAA into QS Investors to reduce the number of brands under the Legg umbrella. “Ultimately, we see Legg Mason having fewer, yet larger brands,” Mr. Sullivan said.
QS Investors, meanwhile, will continue to be led by CEO Janet Campagna and CIO Rosemary Macedo. Some teams from Batterymarch and LMGAA will join QS. Legg Mason (LM) officials said it's too early to know how many employees from each firm will join QS.
William L. Elcock, CEO of Batterymarch, and Francis X. Tracy, president and chief financial officer, will not be joining the newly integrated subsidiary. They both declined to comment.
“The expectation has always been that Janet Campagna and her management team from QS Investors would lead this deal,” Legg Mason spokeswoman Mary Athridge said in an e-mailed response to questions. “Bill and Fran believed this deal was best for their clients and for LM shareholders, so they always expected that this would mean that they would move on after a transition period.”
QS has $4.1 billion in assets under management; Batterymarch, $10.7 billion. QS also has $100 billion in assets under advisement, while LMGAA has more than $10 billion.
Mr. Sullivan also said he believes the solutions business — multimanager asset allocation advice and implementation — not the quant business, will be the driving force of the industry in the years ahead.
This isn't the first time Legg Mason has culled its brands. Last August, Legg shuttered Esemplia Emerging Markets, London, which the company had bought from Citigroup Inc. in 2005.In January 2013, while serving as interim CEO, Mr. Sullivan merged Legg Mason Capital Management, Baltimore, with ClearBridge Investments, New York.
For its part, Batterymarch has seen its assets under management steadily decline. Its $10.7 billion in AUM as of Dec. 31 was down 14.4% from a year earlier, and down 39% from $17.5 billion at Dec. 31, 2011, according to data from the company. At its peak in January 2011, the firm had $23 billion.
The subsidiaries will begin to be integrated next quarter. Mr. Sullivan said he's sad about the end of Batterymarch, but “exhilarated and confident” about QS Investors' future.
“Batterymarch is a pioneer in the quant space, has performed well and has a lot of great people,” Mr. Sullivan said. “But to have competing brands in the marketplace will confuse investors. We believe that the Batterymarch and LMGAA people will make QS Investors better.”
This article originally appeared in the March 17, 2014 print issue as, "Batterymarch's demise marks the end of an era".