Deutsche Asset & Wealth Management executives have been on a global recruiting spree as they seek to rebuild institutional assets and accommodate a growing demand among U.S. institutional clients for alternative investments and smart beta.
The need to grow assets under management is obvious: Data from Pensions & Investments show Deutsche's U.S. institutional tax-exempt AUM plummeted nearly 70% to $15.68 billion at year-end 2013 from its post-crisis peak of $51.75 billion at year-end 2009.
In addition, Marietta, Ga.-based eVestment LLC lists 27 senior executives as having resigned from the firm globally from 2011 through 2013. Among the senior executives was Kevin E. Parker, managing director and global head of what was then called Deutsche Asset Management, who left in 2012 and is now CEO of Sustainable Insight Capital Management LLP, New York.
The data provider also listed 53 portfolio managers and 66 analysts globally as having left in that period. No information was available on how many left voluntarily and how many were terminated. Some 40 of the portfolio managers and 50 of the analysts were replaced through 2013.
Some of the employee and asset drop can be attributed to the 2010 spinoff of Deutsche's quantitative equity business to QS Investors LLC, which took $11 billion in total assets and 40 employees.
In 2012, parent Deutsche Bank tried to sell its entire asset management business — then later that year just its real estate and infrastructure business, RREEF — to New York-based Guggenheim Partners. After both sets of negotiations fell through, senior executives at RREEF, including managing directors Neil Thassim, head of real estate in Asia, and David R. Maki, head of North American capital markets, jumped ship.
Although sources are divided on how serious company executives are about rebuilding the asset management business, Jerry W. Miller, managing director and head of DeAWM Americas, said Deutsche officials are “100% committed to being among the fastest growers in the U.S. institutional space.”
“In the Americas, we think we're uniquely positioned to deliver solutions to where the market is going, whether in alternatives, smarter beta solutions, risk factors or outcome-oriented products,” Mr. Miller said.
Data from eVestment show that of DeAWM's 64 strategies, 31 are fixed income, 31 are equity, one is real estate and one is balanced/ multiasset.
Big on fixed income
Among those reporting assets to eVestment, the largest are two fixed-income strategies, both of which outperformed their benchmarks: Euro investment-grade corporate fixed income, with $24.63 billion in assets at June 30, and U.S. short duration one-to three-year, with $19.45 billion.
The one-year return through June 30 for the euro investment-grade corporate fixed-income strategy was 27.56%, vs. 7.14% for its benchmark, the iBoxx Euro Corporates index. It returned an annualized 11.29%, for five years, vs. 6.99% for the benchmark; for 10 years, the return was 6.81% vs. 4.73%.
Meanwhile, the one-year return for the short-duration strategy was 1.58%, compared with 0.76% for its benchmark, the Bank of America Merrill Lynch 1-3 Year U.S. Treasury index. It returned an annualized 1.9%, for five years, vs. 1.18% for its benchmark and 3.14% for 10 years, vs. 2.62% for its benchmark.
Performance has not been an issue, but uncertainty over the firm's future has been.
Even before the deal with Guggenheim went south, Deutsche Bank's decision to put RREEF on the block helped lead the Massachusetts Pension Reserves Investment Management board in February 2012 to terminate RREEF America, which at the time ran $250 million in global real estate securities for PRIM. Executives at the $60.7 billion Boston-based pension plan cited lackluster performance and concerns about organizational stability as reasons.
Tulare County Employees' Retirement Association, Visalia, Calif., placed RREEF America II on its watchlist in 2012, shortly after the failed deal with Guggenheim. But David J. Kehler, retirement administrator for the $1.2 billion pension fund, said in an e-mail that TCERA did not terminate its relationship with RREEF and now has about $58 million invested with it.
And the Iowa Public Employees' Retirement System, Des Moines, put RREEF on watch in September 2013 because of organizational issues, but spokeswoman Judy Akre confirmed it was taken off the $26.9 billion plan's watchlist. RREEF manages a $388 million public REIT portfolio and a $385 million private core real estate portfolio for Iowa.
In December 2013, the $38.8 billion Tennessee Consolidated Retirement System, Nashville, rehired DeAWM to invest approximately $257 million in real estate.
In the past year, DeAWM Americas has hired more than a dozen people to boost its institutional business, including managing directors Deepak Khanna, formerly a portfolio manager of large-cap value and multicap value equity strategies at Lord Abbett & Co., as head of U.S. large-cap value equities; Simon Mendelson, previously managing director and global head of product development at BlackRock (BLK) Inc. (BLK), head of product management and development; and Philip Poole, who was global head of macro and investment strategy at HSBC Global Asset Management, as head of research.
Also: Brian Binder, formerly managing director and head of business management and consulting at Invesco (IVZ) Ltd., was hired as president of Deutsche Funds and head of fund administration; Sean Taylor, previously senior vice president and head of global emerging markets equity at Pioneer Investments, was named head of emerging markets equities; and Richard Glass, formerly principal and co-founder of Lockwell Investments LLC, U.S. head of small-cap and midcap value equities.
“We're bringing in professionals with significant experience who can have an immediate impact on our unique and growing set of capabilities, whether they be in alternatives, long-only or passive,” Mr. Miller said.
But industry observers aren't so sure. “I don't know what the endgame is,” said one executive recruiter who asked not to be named. “Do they really want to build a world-class investor, or do they just want to build it up to sell it?”
An investment banker added: “There are rumors that they want to sell it. But I don't think you could sell such a thing (because of its size) ... so they have no choice but to keep it,” he said. “And if they keep it, they can either watch it decay, or replace people and make a big deal about it publicly.”
DeAWM's Mr. Miller declined to comment on rumors executives are building up the division as a means of trying to sell it. “Our goal is to grow the business,” he said. “(We have) total commitment to the business, particularly in the Americas.”
Not all observers are skeptical.
Having been tracking how DeAWM is positioning itself within the institutional investment market, particularly as a provider of liability-based investment services, Sunny Patpatia, president and CEO of money manager consulting firm Patpatia and Associates Inc., Berkeley, Calif., is optimistic. “Like any large organization, you've got ebbs and flows. It's a very impressive organization, particularly the asset management arm,” he said.
Mr. Patpatia said the recruiting efforts show a commitment: “They're recovering, putting good leaders in place.”
Renee Neri, a principal in executive search firm Heidrick & Struggles, who works in the asset management and wealth management practices in New York, said: “They've maintained substantial client assets during a challenging time. It's a strong global firm. If they execute the plan they are putting in place in the U.S., they will succeed.”
Things appear to be turning a corner for the firm. Though U.S. institutional AUM of $15.68 billion at Dec. 31 was flat from the $15.66 billion the year before, it marks the first time since 2007 that its U.S. institutional assetsdidn't decrease.
Also, Mr. Miller pointed out that Deutsche's asset and wealth management group “globally had €11 billion ($14.52 billion) in net inflows across the business” in the second quarter. “I think our momentum is clear and I expect continued progress to be made across all channels, including institutional.”
This article originally appeared in the September 1, 2014 print issue as, "Deutsche Asset entering rebuilding mode".